Expert view: Avoiding the £100,000 tax and benefits trap - how employers can help
Reaching an income of £100,000 matters more than you think. It can trigger a cascade of lost benefits that leave employees significantly worse off. This “tax cliff” affects:
- The personal allowance: Employees lose £1 of their tax-free allowance for every £2 earned over £100,000, resulting in a 60% effective tax rate between £100,000 and £125,140.
- Childcare support*: From September 2025, the government’s expanded childcare scheme offers up to 30 hours of funded childcare per week for 9-month to 3-year-olds — but only for parents earning less than £100,000.
- Tax-free childcare: Worth up to £2,000 per child annually, this benefit also disappears once an employee’s adjusted net income exceeds £100,000.
*In England only.
In short, earning just £1 over the threshold could cost £7,500–£10,000 or more in lost support.
Real-world impact
Many employees are now asking to cap their salaries below £100,000 to avoid losing childcare support. Some are turning down promotions, reducing hours, or opting for non-cash benefits. It’s a rational response to a system that penalises modest pay increases with disproportionate losses.
What employers can do about It
If an employee is close to the £100,000 mark, here are some smart ways to help them stay below the threshold — without sacrificing their financial wellbeing.
1. Use Salary Exchange (also called salary sacrifice)
Employees could redirect part of their salary into a pension scheme. This lowers their taxable income and boosts retirement savings.
For example, exchanging salary for an equivalent contribution into pension could restore access to thousands in tax and National Insurance Contribution (NIC) savings, and in childcare support.
Other salary exchange options include:
- Electric vehicle (EV) leasing schemes
- Cycle-to-work programmes
- Additional annual leave.
These benefits are tax-efficient and help reduce employees’ adjusted net income.
2. Restructure bonuses
Employers could consider restructuring bonuses to enable them to be deferred or paid as pension contributions or share options. This avoids pushing income over the cliff in a single tax year.
Emma’s £100,000 dilemma
Emma earns £100,000 and is awarded a £10,000 bonus. The impact of this could be:
- Higher rate tax on the bonus;
- The loss of childcare support; and
- The loss of some of her personal allowance leading to an effective rate of tax of 60%.
To avoid this, Emma salary-sacrifices £10,000 into her pension, keeping her adjusted income at £100,000 and preserving her childcare support.
3. Adjust working hours
If an employee is paid hourly or has a flexible contract, they may want to consider reducing their hours temporarily while their children are eligible for childcare support. Even a small reduction could make a big difference if it reduces adjusted net income below £100,000.
4. Claim allowable deductions
Certain expenses can reduce adjusted net income — like professional subscriptions or charitable donations qualifying for Gift Aid. Make sure employees are claiming everything that they’re entitled to.
5. Plan ahead
Keep an eye on employees who are close to the threshold because timing matters. For example:
- Delay income (e.g. bonuses or freelance work) to the next tax year. This can be effective if the employee anticipates lower earnings in the next tax year
- Bring forward pension contributions or charitable donations
- Support employees with access to a financial planner. Professional personal financial planning from experts like Broadstone can help employees to make sure that they are making use of the allowances available to them and are on-track to achieve their financial objectives.
HMRC’s Adjusted Net Income calculator can be used by employees to model their situation and plan accordingly.
Final thoughts
The £100,000 ‘tax trap’ is an example of how a well-intentioned benefit system can create unintended consequences. With smart financial planning and open conversations with employees, employers can help them to avoid the trap and retain valuable skills.
This article is for information purposes only and is not a personal recommendation or advice. Pension and tax rules apply, and may change in the future.
Supplied by REBA Associate Member, Broadstone
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