A salary increase should be cause for celebration, especially with the cost of living continuing to stretch household finances.
However, for a growing number of UK earners, hitting certain income thresholds can mean keeping less of every additional pound than they expected. Frozen tax bands, the tapering of the Personal Allowance and the High Income Child Benefit Charge all combine to create some genuinely punishing effective tax rates.
If you have recently had a pay rise are expecting one, it is worth understanding exactly where the tax traps lie.
The £100,000 cliff edge
The most significant trap is the loss of the Personal Allowance for earnings between £100,000 and £125,140.
The Personal Allowance is the £12,570 of income you can earn tax-free. Once your adjusted net income passes £100,000, that allowance is reduced by £1 for every £2 of income above the threshold, which means that it has gone entirely by £125,140.
On every pound earned between £100,000 and £125,140, you lose 40 per cent in higher-rate Income Tax plus a further 20 per cent through the lost allowance, giving an effective marginal rate of 60 per cent. National Insurance compounds this further.
The High Income Child Benefit Charge
If you or your partner claim Child Benefit, another trap applies once either of your individual incomes passes £60,000.
Between £60,000 and £80,000, Child Benefit is gradually clawed back through the High Income Child Benefit Charge. Above £80,000, it is wiped out entirely.
For a family with two children, this can add the equivalent of an extra eight to ten per cent of marginal tax to that income band.
Combined with higher-rate Income Tax and National Insurance, some parents face effective marginal rates of around 60 per cent on income they had assumed would simply boost the household.
Frozen thresholds are quietly making it worse
Most Income Tax thresholds have been frozen since 2021/22 and are due to remain frozen until at least 2031, while wages continue to grow.
That mismatch is what the Office for Budget Responsibility calls “fiscal drag”: each year, more people are drawn into higher-rate tax, the Personal Allowance taper or the Child Benefit charge, simply because their pay has risen while the thresholds have not.
If you were a basic-rate taxpayer a few years ago, a couple of routine pay rises may have quietly pushed you into a much higher effective rate.
What you can do
There are several ways to reduce your adjusted net income and retain more of each pay rise:
Pension contributions – Increasing personal or salary sacrifice contributions reduces taxable income.
- Gift Aid donations – Extends your basic-rate band and reduces adjusted net income for the £100,000 threshold.
- Salary sacrifice for other benefits – Cycle to work schemes, electric vehicles and additional holiday are all tax-efficient benefits to consider.
- Timing of bonuses – Where flexibility exists, deferring income across tax years can help. Where possible, ask whether bonuses or other performance-related pay can be delayed.
