If you earn £100,000 or more, your income is significantly higher than the UK average. In fact, according to Statista, the median average wage in the UK in 2023 was £34,963.

So, progressing in your career to the point where you’re earning six figures is a significant achievement. Hopefully, this level of earnings will allow you to maintain a good quality of life for your family and work towards your goals for the future.

However, once you start earning more than £100,000, there are several “stealth taxes” you might need to be aware of. These are indirect levies that often go unnoticed and aren’t recognised as official taxes.

Read on to learn about three stealth taxes that you may need to be aware of if you earn more than £100,000.

1. You could be caught in the “60% tax trap”

If you earn more than £100,000, you could be caught in the “60% tax trap”. Because of the way tax rates and thresholds work, this means you effectively pay 60% Income Tax on the portion of your earnings between £100,000 and £125,140.

In the 2024/25 tax year, you can earn up to £12,570 before you pay Income Tax. This is known as your “Personal Allowance” – you’ll pay Income Tax at your marginal rate on any income that exceeds the threshold.

However, when you earn more than £100,000, you may start losing some of your Personal Allowance, as it reduces by £1 for every £2 of earnings that exceed £100,000.

As a result of this Personal Allowance tapering, you could effectively pay 60% tax on earnings between £100,000 and £125,139. If your earnings reach or exceed £125,140, you will no longer benefit from any Personal Allowance.

For example, if you earn £100,000, and you then received a £1,000 pay rise, you would pay £400 – your marginal rate of 40% – tax on the extra income. However, you would also lose £500 of your Personal Allowance. This additional £500 would be taxed at your marginal rate of 40%, meaning you pay another £200.

So, you pay a total of £600 tax on the additional £1,000, meaning you effectively pay 60% tax on earnings between £100,000 and £125,140.

Yet, you might not realise that the 60% tax trap affects you because, as a higher-rate taxpayer, you “officially” pay 40% tax on your earnings between £50,271 and £125,140.

2. You could lose 2 valuable childcare benefits if you or your partner earns more than £100,000

The government offers two schemes to help parents manage the cost of childcare – “free childcare hours” and “tax-free childcare”.

Every child aged nine months to two years qualifies for 15 hours of free childcare a week, for 38 weeks each year.

Additionally, each child aged three or four may be eligible for another 15 hours a week, bringing the total to 30, provided you meet certain criteria. Both parents (or the sole parent in a single-parent household) must be working and earning the national minimum wage for at least 16 hours a week, on average.

You may also benefit from the tax-free childcare scheme. This allows you to pay into a “childcare account” and for every £8 you contribute, the government will add £2. You can then use these funds to pay for childcare if the provider is registered with the tax-free childcare scheme.

The government contributions are capped at £500 every three months, up to £2,000 a year. This rises to £1,000 every three months, up to £4,000 a year if your child has a disability.

However, you lose both of these childcare benefits immediately if you or your partner earns more than £100,000.

In March 2023, IFA Magazine reported that if you lived in inner London, where childcare costs are highest, you may lose free childcare hours worth £23,300 a year if you earn more than £100,000 and have two children. Additionally, you could lose £2,000 a year per child – or £4,000 if your child has a disability – as you no longer qualify for the tax-free childcare scheme.

Even if you live in an area where childcare is less expensive, this stealth tax could significantly affect your wealth as you must cover the full childcare costs yourself.

You will likely have already lost your Child Benefit payments

Child Benefit provides a regular payment of £25.60 a week for your first child and £16.95 a week for each subsequent child. If you had two children, this would mean you receive £2,212.60 a year to help you pay for clothes, groceries, family days out, and anything else your children might need.

Unfortunately, you may start losing some of your Child Benefit payments when your earnings exceed £60,000. If you earn £80,000 or more, you likely won’t receive any payments.

This is because Child Benefit is means-tested and if you or your partner have a “net adjusted income” – your total taxable income – of £60,000 or more, you may trigger the “High Income Child Benefit Charge”.

Note that it is the individual income that matters, not your household income.

If you do trigger the charge, your Child Benefit payments will fall by 1% for every £200 that your net income exceeds £60,000. This means that if you earn £80,000, you could lose 100% of your Child Benefit payments.

So, while it comes into effect earlier, you may still need to be aware of the High Income Child Benefit Charge.

As a result of these three stealth taxes, you could lose a significant portion of your income if you earn more than £100,000.

Increasing your pension contributions could help you reduce your tax bill

If you’re concerned about stealth taxes, there are ways to potentially reduce your bill, such as increasing your pension contributions.

This could benefit you as it allows you to reduce your taxable income and you also receive tax relief at your marginal rate on the contributions.

For example, if you earn £110,000, you could effectively pay 60% tax on £10,000 of your earnings as you lose some of your Personal Allowance.

However, if you contributed that £10,000 to your pension instead of taking it as income, you would receive 40% tax relief as a higher-rate taxpayer. Further to this, you wouldn’t lose any of your Personal Allowance because your earnings no longer exceed £100,000.

You would also retain your free childcare hours and benefit from the tax-free childcare scheme, potentially saving you a significant amount in childcare costs each year.

Additionally, your employer may match the extra payments and the wealth in your pension is invested, allowing it the opportunity to grow over time.

By adjusting your pension contributions in this way, you might be able to reduce the tax you pay and build more retirement savings for the future.

Get in touch

If you’re concerned about stealth taxes, we can help you find appropriate ways to retain more of your wealth and help you attain your long-term financial goals.

Please contact us at hello@ardentuk.com or call or message us on WhatsApp on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. 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.