High Earners Reject Pay Rises To Avoid £100,000 Tax Trap

Introduction

A growing number of UK professionals are refusing salary increases and bonuses to avoid crossing the £100,000 annual income threshold. Those who exceed this threshold may face significant tax penalties and the loss of several government benefits, including the tax-free personal allowance and childcare support.

The phenomenon is generating concern among financial experts and employers, who warn it may disincentivise professional progression and reduce overall labour market productivity.

Why are workers rejecting pay rises?

Employees in both private and public sectors are increasingly declining financial rewards that would push their annual income above £100,000. The main deterrent is the sharp increase in the effective tax rate once this threshold is crossed, as well as a reduction in eligibility for certain tax benefits. One professional, identified as Kate, shared that an unexpected bonus caused her financial anxiety rather than relief. She explained that accepting the additional income would have triggered the loss of valuable allowances, making her financially worse off despite a higher nominal salary.

How tax rules affect the £100,000 threshold

Under current UK tax regulations, the tax-free personal allowance currently £12,570—begins to be withdrawn once an individual’s adjusted net income exceeds £100,000. For every £2 earned above this level, £1 of this allowance is lost, resulting in a significant increase in the marginal tax rate. Individuals whose income falls between £100,000 and £125,140 face an effective marginal tax rate of 60 per cent due to the withdrawal of this allowance in addition to standard income tax and National Insurance contributions. Financial planning experts calculate the actual effective rate can sometimes exceed 60 per cent due to other factors.

Childcare support and lost allowances

Exceeding the £100,000 threshold also affects eligibility for other government support, notably funded childcare. Many families rely on the government’s 30 hours of free childcare per week, which is unavailable to those whose adjusted net income exceeds the cap. For households with two working parents and children in qualifying age groups, the value of lost support can exceed £10,000 per child per year. In addition, families can miss out on up to £2,000 per child annually from tax-free childcare accounts, compounding the financial pressure.

Financial impact on families

Several professionals have reported that accepting modest salary increases or bonuses could leave them worse off financially, due to the combined effect of higher taxes and loss of allowances. Kate stated that the “relatively small bonus would have cost [her] thousands,” and that the system essentially penalises additional effort. Many high-earning families now weigh up the full implications of crossing the threshold, with some choosing to request lower bonuses or extra holiday instead of cash rewards. This behaviour appears to be becoming more widespread across sectors.

Expert commentary on tax incentives

Experts warn that the current tax structure is distorting behaviour and may be counterproductive for economic growth. Michael Healy, managing director for the UK and Ireland at a leading investment group, said, “The system is encouraging people to take their foot off the gas, and is clearly distorting behaviour.” Healy added, “When people are financially better off rejecting a pay rise, it’s a sign the system is fundamentally misaligned with basic economic incentives.” Stephanie Ebner, financial planning lead at Rathbones, described the withdrawal of the personal allowance as “one of the most baffling quirks in our tax system”.