3 key financial downsides of your income exceeding £100,000 a year, and what you can do about them
29/08/2024If you have an income exceeding £100,000 a year, you could be exposed to 3 significant financial downsides. Find out why, and what you could do about them
Having worked so hard to get there, seeing your income exceed £100,000 is a fantastic achievement. You might have climbed your way up to this level throughout your career. Or, you may have built a business that you can now sustainably draw such an income from.
No matter your chosen occupation, this level of wealth can allow you to achieve your goals and really be the biggest beneficiary of all your hard work – provided that you manage it sensibly, of course.
Interestingly, though, there may be some financial downsides to factor in if your earnings are above this level.
Not only will you face high rates of taxation, but you might also lose access to some key allowances, thresholds, and benefits that actually serve to reduce your take-home pay.
This can particularly be an issue if you receive a pay increase that moves your income over £100,000. Suddenly, you might see your tax bill rise or lose access to other entitlements that saved you money previously.
So, discover three key financial downsides to having an income exceeding £100,000 and why it can be disadvantageous to your wealth – plus, make sure you keep reading to discover a method that could help you mitigate the effects.
1. You start to see your Income Tax Personal Allowance reduce
An income of £100,000 naturally attracts a higher rate of taxation – but there may be other Income Tax considerations associated with this level of earnings.
The rate of Income Tax you pay depends on your total income and how much of it falls into each band. The table below shows the Income Tax rates in the 2024/25 tax year:
As you can see, with an income of £100,000 or more, a portion of this will likely fall in the higher- or additional-rate bands (assuming you do nothing else to mitigate your tax liability).
But crucially, when your income reaches the £100,000 threshold, a taper kicks in for the Personal Allowance, which is the tax-free portion of your earnings.
For every £2 that your adjusted net income – that is, your total taxable income without any deductions, such as for tax relief – exceeds £100,000, your Personal Allowance is reduced by £1. This means that it tapers away entirely if you have any earnings in the additional-rate band starting from £125,140.
As a result, you’re essentially taxed twice on earnings between £100,000 and £125,140. This is sometimes referred to as the “60% tax trap”. That’s because it effectively means you pay 60% Income Tax on your earnings in this bracket because the first £12,570 becomes liable for 40% higher-rate tax.
Imagine that you went from earning £100,000 to £110,000. You would only see £4,000 of that increase, as you’d pay:
- 40% tax on £10,000 = £4,000
- 40% tax on £5,000 of your lost Personal Allowance = £2,000.
That would be a total tax bill of £6,000, marking 60% of your pay increase – and that’s all before other deductions, such as for National Insurance (NI).
So, although a pay increase above this threshold is no doubt still very welcome, it might actually be worth less than you think.
2. You could lose access to childcare benefits
When you have an income of £100,000 or more, you may lose access to two important childcare benefits:
- Free childcare hours. If you have children between nine months and four years old, you can access free childcare hours for 38 weeks each year. You can usually get 15 hours of free childcare a week for nine-month- to two-year-olds, and 30 hours for three- to four-year-olds. This is set to become 30 hours for all under-fives from September 2025. Both parents (or just an individual in a single-partner household) must work and earn the national minimum wage for at least 16 hours a week, on average.
- Tax-free childcare. You can pay into a childcare account and receive £2 of government tax relief for each £8 you contribute, giving you a pot of funds you can use to pay for childcare with providers registered under the tax-free childcare scheme. Government contributions are capped at £500 for every three months, up to £2,000 a year (rising to £1,000 and £4,000 respectively for disabled children).
These entitlements are taken away when your income reaches £100,000 or more. This happens at a cliff edge, too, so earning just £1 over the threshold would see you lose both of these entitlements.
This would mean losing up to £2,000 (or £4,000 for parents of disabled children) from the government under the tax-free childcare scheme.
Meanwhile, the cost of losing childcare hours will depend on where you are in the country. But on average, according to figures published by IFA Magazine in March 2023, a parent claiming 30 hours a week for two children would lose childcare support of £21,718 a year.
3. You will likely be subject to the High Income Child Benefit Charge
Alongside losing access to free or tax-advantaged childcare, you may also need to be aware of what happens to your entitlement to Child Benefit.
This particular downside actually kicks in before the £100,000 limit. But, it’s well worth being aware of if you’re a high earner.
You can claim Child Benefit payments from the day your child is born, and it can offer a highly useful sum to help you with the costs of raising children.
In 2024/25, the weekly amount paid for Child Benefit is:
- £25.60 for an eldest or only child
- £16.95 for each additional child.
However, high earners start to lose their entitlement to Child Benefit payments if either you or your partner individually has an adjusted net income over £60,000 (2024/25 tax year).
If your or your partner’s earnings are above this amount, you may be affected by the High Income Child Benefit Charge, which effectively reduces your payments by 1% for every £100 you exceed the threshold.
This sees your entitlement taper away to nothing if you have an income of £80,000 or more. So, by the time you’re earning £100,000, it’s likely that you’ll have your entire Child Benefit entitlement taken away.
It’s worth noting that it can still be worth claiming Child Benefit, even if you are over the maximum threshold. Although you can’t financially benefit directly, you automatically receive a credit on your NI record if your child is under 12. So, it can still make sense to claim as it can contribute toward your State Pension entitlement.
Making pension contributions could take you back below the threshold
Now that you’re aware of three issues you could face when your earnings exceed £100,000, it’s worth considering a method that might help mitigate these effects: paying more into your pension.
Pension contributions could reduce your net adjusted income to back below the £100,000 threshold.
Of course, this might require significant contributions to get your earnings back below the High Income Child Benefit Charge threshold. Even so, this could be financially worthwhile, provided that you don’t need this wealth in the short term – you won’t be able to access your pension until age 55 (rising to 57 in 2028).
Furthermore, you’ll receive tax relief at your marginal rate of Income Tax. This effectively mitigates the 60% tax bill because:
- Your Personal Allowance will be restored if you reduce your income to below £100,000
- You’ll usually receive 20% basic-rate tax relief automatically, and you’re able to claim a further 20% or 25% through a self-assessment tax return.
So, it may be an option to consider increasing your pension contributions if you have earnings over £100,000.
Get in touch
If you’d like help managing your wealth if your income exceeds £100,000, or you want to find out more about planning opportunities like this, please do get in touch with us at Douglas White Financial Planning.
Email info@douglaswhiteltd.com or call 0151 345 6828 today for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
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