7 top tax tips for those earning income over 100k in the UK
Earning over £100,000 can offer a lot of financial security, but there’s much to consider if you want to be tax-efficient and minimise your tax bill.
Those who earn over £100,000 are among the top 4% of UK earners – yet only 1% would describe themselves as ‘wealthy,’ according to HSBC.
When someone earns over £100k, they may fall into the 60% tax trap, which can significantly impact wealth.
We explore why high earners need to be tax-efficient and reveal top tips to help them legally minimise their tax bill.
Earning over £100,000 is a major achievement, but you may be taxed 60%.
You’ll also lose major childcare benefits, which can be costly.
However, there are legal ways to be more tax-efficient, although it may also be worth considering expert financial advice.
Why do high earners need to be tax-efficient?
Earning over £100,000 is an exciting milestone, but it often comes with changes to tax benefits.
For example, when your adjusted net income (your total taxable income excluding your personal allowance and certain tax reliefs) exceeds £100k, you’ll start to lose your personal allowance.
For every £2 you earn over £100k, your personal allowance is reduced by £1. Once your income reaches £125,140, you’ll have no personal allowance.
Additionally, for every £100 earned over the £100k threshold, you pay the standard 40% higher rate of income tax.
This results in an effective tax rate of 60% for those earning over £100,000.
It’s important to note that trading losses, Gift Aid donations, and pension contributions (relief at source schemes only) may be deducted to figure out your adjusted net income.
Impact on tax reliefs and benefits
However, this isn’t the only change you need to navigate.
Individuals with an adjusted net income of over £100,000 lose many childcare benefits, including:
Tax-free childcare: Up to £2,000 a year per child, which can be used to help with childcare costs.
Free childcare: This allows families to access 30 hours of free childcare per week for children between the ages of nine months and four.
It’s worth stressing that if either you or your partner’s adjusted net income exceeds £100,000, you both lose these benefits.
According to data from AJ Bell, the loss of tax-free childcare and free childcare would cost families over £27,000 a year.
This is a considerable amount to lose and would require a substantial pay rise to offset this impact.
What tips will help if I earn over £100,000?
It’s essential to be proactive once your income exceeds £100,000, so you don’t pay more tax than you need to or miss out on valuable childcare benefits.
Here are some top tips to help you be as tax-efficient as possible.
1. Contribute more to your pension
This can be a really useful tip, especially if your income is a little over £100k.
For example, if you earn £105,000 and you pay £5,000 into your pension, you can keep your personal allowance – and help build a more secure retirement.
By paying more into your pension, you can bring your net adjusted income under the threshold, avoid paying 60% tax and maintain your childcare benefits.
There are also many benefits to topping up your pension, including tax relief, investment growth, and compound interest.
2. Build your savings and pay off debt
It’s a good idea for anyone – regardless of their salary – to have three to six months’ worth of savings in an emergency fund to help should something unexpected happen, such as redundancy.
Paying off any outstanding debt is also worthwhile, especially if you’re paying a higher rate of interest on any loans compared to the interest rate on your savings.
If you have a mortgage, you could consider making overpayments.
This can be very useful if you’re planning to remortgage soon and want to reach a lower loan-to-value (LTV) on your property, which is how much of the property’s value you’re borrowing as a percentage.
The lower your LTV is, the more competitive deals you may be able to access.
3. Watch out for ‘lifestyle inflation’
When you make more money, it can be tempting to spend more, whether it’s on dining out or choosing more expensive branded products.
While these changes may seem small, they can add up over time, especially if inflation rises, and may impact your ability to reach your long-term savings goals.
4. Calculate the cost of lost childcare benefits
Childcare in the UK is notoriously expensive – and while a higher salary may seem like the solution, exceeding the £100,000 threshold can be costly.
As mentioned, losing the tax-free childcare and free childcare can cost families over £27,000 in a year.
If childcare is a priority, it’s worth considering if extra pension contributions can help reduce your adjusted net income to under £100k.
You’ll need to stay within the pension annual allowance, which is the lowest of £60,000 or 100% of your UK earnings.
You could also use a salary sacrifice scheme, which reduces your take-home pay in exchange for additional pension payments (or other benefits), as well as the income tax and national insurance that you and your employer pay.
While pension contributions of over £2,000 annually under salary sacrifice will no longer benefit from national insurance savings from April 2029, this is still worth considering.
5. Donate to charity and use Gift Aid
Gift Aid donations can help extend your basic-rate tax band and can be particularly helpful for higher and additional-rate taxpayers.
Any donation should qualify as long as it is not more than four times what you’ve paid in tax during that tax year.
You can also claim back the difference between the tax paid on any donations and what the charity received via a self-assessment form or by contacting HMRC.
6. Use an ISA
An individual savings account (ISA) can help you protect up to £20,000 of savings or investments from income, dividend and capital gains tax.
It’s worth flagging that the cash ISA allowance will reduce from £20,000 to £12,000 for under-65s from April 2027 (over-65s keep the whole allowance).
From this date, you can pay in £20,000 into a stocks and shares ISA or split this allowance between various ISAs, including the cash ISA.
7. Consider expert financial advice
It can be difficult to navigate the tax rules when your income exceeds £100,000.
One way to help manage your tax bill and help you retain valuable benefits is to seek expert financial advice.
Unbiased can match you with a qualified financial adviser who can help you decide on the best course of action based on your circumstances.
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