Personal Allowance Tapering 2026-27: Complete Guide

If you earn over £100,000 a year, you start losing your Personal Allowance at a rate of £1 for every £2 you earn above that threshold. By the time your income hits £125,140, your Personal Allowance disappears entirely. This creates a hidden 60% tax trap between £100,000 and £125,140 where you pay 40% income tax plus effectively another 20% from losing the allowance. The good news: pension contributions, Gift Aid donations, and salary sacrifice can pull your income back below £100,000 and restore some or all of your allowance.

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 2026-27, that figure is £12,570 for most people. This means the first £12,570 you earn is tax-free.

Once your income goes above £12,570, you start paying tax on the excess. For most earners, that's 20% basic rate tax up to £50,270, then 40% higher rate tax beyond that. Simple enough — until your income crosses £100,000.

The £100,000 Threshold: Where Tapering Begins

When your adjusted net income exceeds £100,000, HMRC starts clawing back your Personal Allowance. This process is called "tapering" or "abatement," and it's governed by the Income Tax Act 2007 section 35 [ITA 2007 s. 35].

Here's how it works: for every £2 your adjusted net income goes above £100,000, you lose £1 of your Personal Allowance.

The Maths

Standard Personal Allowance: £12,570
Taper starts at: £100,000
Taper rate: £1 lost for every £2 earned above £100,000
Personal Allowance reaches zero at: £125,140

Let's prove that last figure: £12,570 × 2 = £25,140. Add that to £100,000 and you get £125,140. At that point, your entire allowance has been tapered away.

What is "Adjusted Net Income"?

This is crucial. Adjusted net income is not the same as your gross salary. It's calculated as:

Total taxable income (salary, bonuses, savings interest, rental profits, dividends, pension income, etc.)
Minus certain deductions (mainly pension contributions made under relief-at-source or net of tax, and Gift Aid donations grossed up)
Plus any employer pension contributions you've made via salary sacrifice (these reduce your taxable income in the first place, so they're already accounted for)

The key point: gross pension contributions you make personally (and claim tax relief on) and Gift Aid donations reduce your adjusted net income. This is the main escape route from the taper trap.

The 60% Tax Trap

Between £100,000 and £125,140, you face an effective marginal tax rate of 60%. Here's why:

You pay 40% higher-rate income tax on every pound in this band (you're already a higher-rate taxpayer at this income level)
You lose 50p of Personal Allowance for every £1 earned, which means an extra 50p of your income (that was previously tax-free) now gets taxed at 40%
40% of 50p = 20p
Total effective rate: 40% + 20% = 60%

This is not a formal tax band. HMRC doesn't call it "the 60% band." But in practice, that's what you're paying.

Example: James Earns £110,000

James is a software engineer with a salary of £110,000 in 2026-27. Let's see what happens to his Personal Allowance.

Adjusted net income: £110,000
Amount over £100,000: £10,000
Personal Allowance reduction: £10,000 ÷ 2 = £5,000
Remaining Personal Allowance: £12,570 – £5,000 = £7,570

James now pays tax on £110,000 – £7,570 = £102,430 of his income, instead of £110,000 – £12,570 = £97,430 if he'd kept his full allowance.

The extra £5,000 of income that's now taxable costs him £5,000 × 40% = £2,000 in additional tax, on top of the 40% tax he's already paying on the £10,000 itself (£4,000). So that £10,000 of extra income over £100,000 costs him £6,000 in total tax — a 60% effective rate.

Example: Aisha Earns £130,000

Aisha is a consultant earning £130,000. Her adjusted net income is well above £125,140, so her Personal Allowance is £0.

She pays tax on her entire £130,000:

First £12,570 at 20% (normally tax-free, but not for her): £2,514
Next £37,700 (£12,570 to £50,270) at 20%: £7,540
Remaining £79,730 (£50,270 to £130,000) at 40%: £31,892
Total tax: £41,946

If Aisha had kept her full Personal Allowance, she'd have saved £12,570 × 40% = £5,028. That's the cost of earning over £125,140.

How to Reduce Your Adjusted Net Income (and Keep Your Allowance)

The most effective way to avoid or reduce the taper is to lower your adjusted net income below £100,000, or at least closer to it. Here are the main strategies:

1. Pension Contributions

Making personal pension contributions is the single most powerful tool. When you pay into a pension:

Relief-at-source schemes (most personal pensions): You pay in net of basic-rate tax. A £10,000 contribution costs you £8,000. HMRC adds £2,000 automatically. You then claim back the extra 20% higher-rate relief (£2,000) via your tax return. Crucially, the gross £10,000 reduces your adjusted net income.
Net pay schemes (some workplace pensions): Contributions come out of your gross salary before tax is calculated, so they reduce your taxable income directly.

Either way, the effect is the same: your adjusted net income falls.

Example: James Contributes £20,000 to His Pension

Remember James earning £110,000? Let's say he makes a gross pension contribution of £20,000.

New adjusted net income: £110,000 – £20,000 = £90,000
This is now below £100,000, so his full Personal Allowance of £12,570 is restored.

The tax saving:

He avoids losing £5,000 of his Personal Allowance (worth £2,000 in tax)
He gets 40% relief on the £20,000 contribution: £8,000
Total benefit: £10,000 (£8,000 + £2,000)

If James is in a relief-at-source scheme, the £20,000 gross contribution costs him only £12,000 net (£20,000 × 60%, after basic-rate relief and higher-rate relief). But he's also saved the £2,000 from keeping his allowance, so his true net cost is £10,000 for a £20,000 pension contribution. That's a 50% top-up from tax relief.

2. Salary Sacrifice

If your employer offers salary sacrifice for pensions, you agree to reduce your contractual salary in exchange for an employer pension contribution. This reduces your gross pay before it's counted as income, so it never appears in your adjusted net income calculation.

Salary sacrifice also saves you National Insurance (both employee and employer NI), which pension contributions alone don't affect. For someone in the taper zone, this can be extremely valuable.

Example: Aisha Sacrifices £30,000

Aisha earns £130,000. She arranges to sacrifice £30,000 of salary into her pension.

New gross salary: £100,000
Adjusted net income: £100,000
Personal Allowance: £12,570 (fully restored)

She's now just at the threshold. She saves:

£12,570 × 40% = £5,028 from regaining her allowance
40% income tax on £30,000 = £12,000
2% employee NI on £30,000 = £600
Total saving: £17,628

Her employer also saves 13.8% employer NI (£4,140), which they might share with her or reinvest in her pension.

3. Gift Aid Donations

Charitable donations made through Gift Aid also reduce your adjusted net income. The charity claims basic-rate tax back from HMRC, and you can claim higher-rate relief.

A £10,000 net donation is grossed up to £12,500 for tax purposes, and that £12,500 reduces your adjusted net income.

This is less flexible than pensions (you're giving the money away), but if you're charitably inclined, it's worth timing donations strategically if you're near the £100,000 threshold.

4. Trading Losses and Other Deductions

If you're self-employed or a partner in a business, trading losses can reduce your adjusted net income. Similarly, certain employment expenses (if you're entitled to claim them) can help, though these are rare for most employees.

Common Mistakes

Mistake 1: Not Realising You're in the Taper Zone

Many people earning £100,000–£125,140 don't know about the 60% trap. They see "40% taxpayer" on their payslip and assume that's their marginal rate. They might turn down overtime, a bonus, or a pay rise thinking it's "not worth it" at 40%, when in reality they're losing 60p in every extra pound.

Fix: Check your adjusted net income. If it's over £100,000, you're in the zone.

Mistake 2: Ignoring Pension Contributions

Some high earners max out their £60,000 annual allowance (or tapered annual allowance if they earn over £260,000 total income), but many don't. If you're earning £110,000 and only contributing £5,000 to your pension, you're leaving a huge tax saving on the table.

Fix: Model the numbers. Even a one-off contribution in a high-earning year can be worth it.

Mistake 3: Confusing Gross and Net Pension Contributions

When you tell your pension provider you want to contribute "£10,000," check whether they mean gross or net. In relief-at-source schemes, you usually pay the net amount (£8,000 for a £10,000 gross contribution). The gross figure is what reduces your adjusted net income.

Fix: Always think in gross terms when calculating your adjusted net income.

Mistake 4: Forgetting About Bonuses and Benefits

Your adjusted net income includes all taxable income: salary, bonuses, taxable benefits (like private medical insurance or a company car), savings interest, dividends, rental income. A £95,000 salary plus a £10,000 bonus puts you at £105,000 — firmly in the taper zone.

Fix: Add up everything. If you're close to £100,000, consider whether you can defer a bonus, sacrifice it into a pension, or make a pension contribution to offset it.

Mistake 5: Assuming It's Not Worth Earning More

Even at 60%, you still keep 40p of every pound. Earning more is still better than earning less. The taper is painful, but it's not a reason to turn down a promotion or a pay rise. It is a reason to be smart about pensions.

What About National Insurance?

The Personal Allowance taper only affects income tax. It doesn't change your National Insurance bill directly. However, if you use salary sacrifice to reduce your income below £100,000, you'll also save employee NI (2% above the upper earnings limit) and your employer saves employer NI (13.8%).

This makes salary sacrifice even more attractive than personal pension contributions for those in the taper zone.

The Taper and Other Allowances

Losing your Personal Allowance doesn't affect:

Your Capital Gains Tax annual exempt amount (£3,000 in 2026-27)
Your ISA allowance (£20,000)
Your dividend allowance (£500)
Your savings starter rate or personal savings allowance (though you likely won't qualify for these at this income level anyway)

It does affect your entitlement to certain benefits and tax credits (like Child Benefit, which starts tapering at £60,000 adjusted net income), but that's a separate calculation.

Record-Keeping and Self-Assessment

If your income is over £100,000, you must complete a Self Assessment tax return, even if you're a simple PAYE employee with no other income. HMRC needs you to report your income so they can calculate the correct Personal Allowance reduction.

On the return, you'll enter your total income, your pension contributions, and any Gift Aid donations. HMRC's system will automatically calculate your adjusted net income and apply the taper.

Keep records of:

P60s and P11Ds from your employer
Pension contribution statements (showing gross amounts)
Gift Aid donation receipts
Any other income sources (bank interest statements, dividend vouchers, rental records)

Planning for the Year Ahead

If you know you'll be in the taper zone in 2026-27 (or any future year), plan early:

Calculate your likely adjusted net income in April, as soon as the tax year starts.
Set up regular pension contributions to bring your income below £100,000, or at least reduce the taper.
Talk to your employer about salary sacrifice if available.
Review in January (before the tax year ends) to see if you need a top-up contribution.

Even if you can't get below £100,000, reducing your adjusted net income from (say) £120,000 to £110,000 saves you £2,000 in tax from the restored allowance, plus the 40% relief on the £10,000 contribution itself.

What to Do Next

If you're earning over £100,000 and want to understand your exact position, chat with AI Tax at myaitax.info. You can ask specific questions like "I earn £115,000 and contribute £8,000 to my pension — what's my Personal Allowance?" and get an instant answer.

If you'd like someone to handle your entire tax return, optimise your pension contributions, and make sure you're not overpaying, book a consultation with AI Accountant (also at myaitax.info). They'll model different scenarios, complete your Self Assessment, and liaise with HMRC on your behalf.

The 60% trap is real, but with the right planning, you can reduce or even eliminate it. Don't leave thousands of pounds on the table — act before the end of the tax year.

Personal Allowance Tapering Explained (2026-27)