The £100,000 tax trap: how a pension contribution could save parents £13,000
Written by Cherry Reynard
27 Oct, 2026
The Chancellor’s ‘boring’ budget is likely to have no room for tackling some of the worst iniquities of the tax system. With that in mind, every person nearing the £100,000 salary mark needs to be vigilant. Small actions can have huge payoffs.
What is the £100,000 tax trap?
Many higher-earning families will be grimly aware of the £100,000 cliff edge. Over this salary level, you start to lose your For the tax year 2024-2025 and 2025-2026, the standard Personal Allowance is £12,570.. You lose £1 of your £12,570 tax-free personal income allowance for every £2 earned, resulting in an effective 60% tax rate on earnings between £100,000 and £125,140. That means a 10% salary increase at a salary of £95,000 would see take home pay rise from £65,657.40 to £70,457.40 (£4,800 for a £9,500 pay rise).
How much childcare do you lose over £100,000?
However, the biggest problem for many families will be the cliff edge on childcare. Those who earn £1 over the £100,000 threshold lose access to the 30 hours of government-funded childcare during school term times, plus tax-free childcare worth up to £2,000 per child each year. IG analysis found that a household with two young children could be more than £13,000 worse off from accepting a pay rise that takes one parent above £100,000. Some parents might need to earn over £140,000 before they are better off than at £100,000.
What counts towards the £100,000 threshold?
It is important to remember that it is not only salary that can push you over the threshold. If you have specific benefits, including gym membership, private medical care or car allowances, they can tip you over. For employees near this bracket, it can be worth encouraging their employer to divert the capital to pension contributions instead. Not as fun, perhaps, but far more tax efficient.
You also need to be wary of any ‘unearned’ income – rental payments, for example, or investment income held outside an ISA. This can also tip you over the edge without realising. Some people have also been caught by child benefit payments. Anyone earning over £60,000 must pay it back (at a rate of 1% for every £200 you earn over £60,000), but for those who have elected to keep it and pay it back, it is taken out by PAYE and counts towards your net earnings. A better option is to opt out of payments altogether, while remaining registered. Details can be found here.
How many people are affected by the £100,000 tax trap?
This tax trap might sound like a niche problem, but IG estimates the number of people earning above £100,000 will rise to 2.5 million by 2031 on current wage growth trends. It says the number already earning above £100,000 has risen to 2.06 million, up around 70% from 1.22 million in 2021/22. The Times reports that senior nurses, army chaplains and headteachers could soon be caught out by the trap as rising public sector wages collide with frozen income tax thresholds.
How can pension contributions get you below £100,000?
Pension contributions are the most powerful tool you have to bring your earnings back below the threshold. The £100,000 threshold is based on your adjusted net income. That means it comes after deducting pension contributions. If you earn £110,000 a year but put £11,000 into your pension, you keep your net income below the threshold, keep your full personal allowance and save £6,600 in tax.
For a family with young children and one earner nearing the £100,000 mark, the maths is powerful. A £2,000 pension contribution (including tax relief) would only cost them £1,200 out of their own pocket, because it attracts tax relief at their marginal rate. However, if it brings them below the threshold, they would be entitled to their childcare costs again – a gain of up to £13,000.
How are people avoiding the £100,000 threshold?
It’s a no brainer and IG finds that people are already taking action. Its research showed that 82% of households where one partner earns £90,000-£125,000 have taken action to avoid crossing the £100,000 threshold in the past, with 28% turning down a promotion. People will often adopt a four-day week to avoid this tax trap. Those who are self-employed generally have greater flexibility to hold their earnings below the thresholds and avoid higher tax rates.
Research published by the think-tank, the Centre for the Analysis of Taxation, found that there is ‘bunching’ around the £100,000 mark, suggesting more and more people are holding their income below the threshold.
Will the government scrap the £100,000 tax trap?
The threshold is finally getting the attention of politicians. The Conservatives have promised to abandon it, saying it puts disincentives on high earners and ultimately reduces the tax take for the government. However, it does not appear to be on the agenda of the current government.
It is absurd that people can be better off turning down promotions, refusing pay rises or holding back their careers to avoid crossing an arbitrary threshold. When people feel they have to stall their careers simply to maintain their standard of living, something has gone badly wrong.
However, fixing it is not easy. Elisa Sofocli, a Partner at law firm Blick Rothenberg, says the options available to the government are unappealing:
Restoring the Personal Allowance while bringing the additional rate threshold down to £100,000 would still leave anyone earning above £125,140 a year better off. In other words, simply moving the additional rate threshold does little to offset the cost of removing the tax trap.
To fully claw back that benefit, the additional rate would need to begin at somewhere below £50,000. That would draw a significant number of taxpayers into the highest rate of income tax and fundamentally change the tax burden for a much broader group of earners.
What other tax thresholds should you watch?
There are other thresholds that need attention. The student loan repayment threshold was frozen in the last budget. Students then pay 9% of their income on everything they earn above £29,385. In practice, few graduates will manage their earnings under this threshold in the long-term, but it is another major disincentive to work and get ahead.
Momentum is building to shift these disincentives in the tax system, but with a cash-strapped government, this is unlikely to happen soon. In the meantime, you need to manage it as best you can. Pension contributions remain the best way to prevent these onerous tax traps.
Frequently asked questions
What is adjusted net income?
It’s your total taxable income (salary, bonuses, rental income, savings interest and dividends outside an ISA) minus certain deductions, such as pension contributions and Gift Aid donations. This is the figure HMRC uses for the £100,000 threshold, not your headline salary.
Does salary sacrifice reduce adjusted net income?
Yes. Because you give up part of your salary in exchange for a bigger employer pension contribution, your taxable pay is lower. Bear in mind that from April 2029, National Insurance relief on pension contributions made through salary sacrifice will be capped at £2,000 per employee per year. Read more in Salary sacrifice pensions explained.
How much tax relief do I get on pension contributions?
The government tops up your contributions in line with your income tax rate. Basic-rate relief is usually added automatically, and higher and additional-rate taxpayers claim the rest through a self-assessment tax return. See our top 10 pension questions answered.
How much can I pay into a pension each year?
Most people can pay in up to £60,000 a year, or 100% of their earnings if lower, and still get tax relief. You may also be able to use unused allowance from the previous three tax years, known as carry forward. Our guide to private pensions (SIPPs) covers the limits.
What if my employer doesn’t offer salary sacrifice?
You can still pay into a workplace pension or open your own personal pension, such as a SIPP. These personal contributions also reduce your adjusted net income. You can compare pension providers.
Do I lose all free childcare if I earn over £100,000?
No. The universal 15 hours for three and four-year-olds isn’t means-tested. It’s the extra 30 hours of funded childcare for working parents and tax-free childcare that stop once either parent’s adjusted net income goes over £100,000.
Is the £100,000 limit per person or per household?
Per person. Two parents each earning £95,000 keep their childcare support, but one parent earning £101,000 and the other earning nothing loses it.
Could the Autumn Budget change the £100,000 tax trap?
It’s not currently on the government’s agenda. For what the Budget might bring and how to prepare, read Autumn Budget 2026: What may be coming and your action plan. For more on pensions generally, visit our pensions hub.
