If your income is above £100,000, you may be unknowingly caught in the Personal Allowance trap — one of the UK’s most punitive tax thresholds. In this blog, we explain what the Personal Allowance is, how it affects high earners, and what steps you can take to protect more of your hard-earned income.
What Is the Personal Allowance?
The Personal Allowance is the amount of income you can earn each tax year before you start paying income tax. For the 2024/25 tax year, the standard Personal Allowance is £12,570. This means the first £12,570 of your income is usually tax-free.
However, once your income exceeds £100,000, the Personal Allowance starts to reduce. For every £2 earned above £100,000, £1 of the Personal Allowance is withdrawn. By the time you earn £125,140, the Personal Allowance is completely removed — meaning all your income is taxable.
This withdrawal creates what’s known as the “Personal Allowance trap”, a marginal tax rate spike that catches many professionals off guard.
Sarah’s Story: A Real-Life Example
Meet Sarah, a successful project manager who recently secured a promotion that took her salary from £95,000 to £145,000. While she was excited about her new role, the increase in income unexpectedly triggered a complete loss of her Personal Allowance.
As Sarah’s income crossed the £100,000 threshold, her Personal Allowance began to taper off. At £125,140, it disappeared entirely. The portion of her income that fell into this band was effectively taxed at 60% — far higher than the 40% higher rate most people expect.
Despite earning more, Sarah found herself paying significantly more in tax, with much of her additional income being lost to HMRC.
Why the Personal Allowance Trap Matters
The loss of the Personal Allowance is not a small issue. It dramatically increases your effective tax rate on income between £100,000 and £125,140.
Here’s a quick breakdown:
- Income in this band is taxed at 40% (higher rate).
- As your Personal Allowance is withdrawn, you lose up to £12,570 of tax-free income.
- This means an extra £5,028 in tax — on top of the 40% already due.
The result? An effective marginal tax rate of 60%.
This is why the Personal Allowance trap is one of the most important considerations for UK taxpayers earning over £100,000.
5 Smart Strategies to Protect Your Personal Allowance
Fortunately, there are FCA-compliant strategies available to reduce your adjusted net income and protect your Personal Allowance. Here are five ways to do just that:
1. Make Pension Contributions
One of the most effective ways to reduce your taxable income is by making pension contributions. This can lower your adjusted net income, helping you retain your Personal Allowance.
If Sarah contributes £25,000 to her pension:
- Her adjusted net income drops to £120,000.
- She regains a portion of her Personal Allowance.
- She reduces her overall tax bill while saving for retirement.
Personal Allowance impact: Pension contributions can help you retain or fully recover your Personal Allowance, especially when used strategically.
2. Gift Aid Donations
Donating to charity via Gift Aid can also reduce your adjusted net income. Gift Aid increases the value of your donation and offers higher-rate tax relief through self-assessment.
By donating £2,000 via Gift Aid:
- The grossed-up donation reduces your adjusted income.
- You may regain part of your Personal Allowance.
- You also support charitable causes — a win-win.
Note: Keep thorough records to claim this relief correctly.
3. Salary Sacrifice Schemes
Salary sacrifice arrangements (e.g., pension contributions, cycle-to-work schemes, or electric car leasing) reduce your gross income, which may help you avoid the Personal Allowance trap.
If Sarah sacrifices £10,000 into a company pension:
- Her gross income drops below the £100,000 threshold.
- She retains her full Personal Allowance.
- She benefits from income tax and National Insurance savings.
Personal Allowance impact: This approach is often employer-dependent but can be highly effective.
4. Spousal Income Planning
If you have a spouse or civil partner with lower earnings, transferring income-producing assets can help optimise your combined tax efficiency.
This might include:
- Transferring rental property ownership.
- Sharing investment portfolios.
- Allocating dividends.
While this won’t directly recover your Personal Allowance, it can reduce your overall family tax liability.
Important: Legal and financial advice is essential when restructuring income.
5. Tax-Efficient Investments
Although tax-efficient investments won’t reduce your income for Personal Allowance purposes, they can provide significant income tax relief and long-term growth potential.
- ISAs allow you to earn income and gains tax-free.
- Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) offer tax relief of up to 30%.
These options may be suitable for individuals willing to accept investment risk in return for long-term benefits.
Why Professional Financial Advice Matters
Understanding and planning around the Personal Allowance is not something most individuals can (or should) do alone. Tax rules can be complex, and HMRC thresholds often shift over time.
At Castle Stonebridge Financial Planning, we specialise in helping high earners:
- Reduce unnecessary tax liabilities.
- Retain their Personal Allowance where possible.
- Build long-term financial strategies tailored to their goals.
Our advisers are FCA-authorised and bring years of expertise in navigating complex income scenarios for clients across a range of industries.
Take Control of Your Personal Allowance and Your Future
The Personal Allowance trap is real — but it doesn’t have to define your financial future. With the right planning, you can protect your income, grow your wealth, and avoid unnecessary tax payments.
If your income is nearing or exceeding the £100,000 mark, it’s time to take action. Don’t let a pay rise cost you more than expected.
Speak to Castle Stonebridge Financial Planning Today
At Castle Stonebridge, we work with professionals like you to develop tax-efficient strategies that help make the most of your income — not just for today, but for your long-term financial future.
📞 Schedule a free consultation
🌐 www.castlestonebridge.co.uk
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Let us help you navigate the complexities of the Personal Allowance — and keep more of what you earn.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Tax treatment depends on individual circumstances and may be subject to change. Always seek personalised advice from an FCA-authorised adviser before making financial decisions.
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