Salary Sacrifice and the £100,000 Tax Trap 2026/27

Published by the UK Money Calculators editorial team. Last updated for the 2026/27 tax year.

Earn above £100,000 and you start losing your personal allowance. By £125,140 it is gone entirely. In the £100,000–£125,140 band the effective marginal tax rate is 60%. Salary sacrifice into a pension is the most effective financial action available to anyone sitting in that range. This page explains the mechanics and the numbers.

How the 60% trap works

The personal allowance for 2026/27 is £12,570. HMRC withdraws £1 of personal allowance for every £2 of income above £100,000. At £125,140 the allowance is fully gone (£25,140 ÷ 2 = £12,570 lost).

The 60% rate arises because every additional £2 of income is taxed twice. Directly: 40% higher rate = £0.80 on £2. Indirectly: that £2 triggers £1 of allowance loss, which would have sheltered £1 from 40% tax — an extra £0.40. Total: £1.20 tax on £2, or 60%.

For Scottish taxpayers the rates differ. Scotland has a 42% higher rate from £43,663 and different threshold interactions. But the principle is the same — personal allowance withdrawal creates a super-high effective rate in the withdrawal band.

How salary sacrifice solves it

Salary sacrifice reduces your adjusted net income (ANI). That is the figure HMRC uses for the personal allowance withdrawal calculation. Every pound sacrificed above £100,000 reduces ANI by £1, restoring £0.50 of personal allowance and saving tax at the 60% effective rate.

So a £10,000 pension sacrifice at a salary of £108,000 saves: 60% × £8,000 (clearing the taper zone) + 40% × £2,000 (the remaining sacrifice in the standard higher-rate band) = £4,800 + £800 = £5,600 in income tax. Add employee NI: £10,000 × 2% = £200. Total saving: £5,800. Net cost of the £10,000 contribution: only £4,200 — a 58% discount.

Worked example: £108,000 salary

Salary: £108,000. ANI before sacrifice: £108,000. Personal allowance reduced by (£108,000 − £100,000) ÷ 2 = £4,000. Effective personal allowance: £8,570.

After sacrificing £8,000 into pension: ANI drops to £100,000. Personal allowance fully restored to £12,570. Tax saving = 60% × £8,000 = £4,800. Employee NI saving: 2% × £8,000 = £160. Total saving: £4,960. Net cost of £8,000 pension contribution: £3,040.

Monthly equivalent: £667/month into pension, costing only £253/month from take-home. The other £413/month comes from tax savings.

Worked example: £120,000 salary

Salary: £120,000. ANI before sacrifice: £120,000. Personal allowance reduced by (£120,000 − £100,000) ÷ 2 = £10,000. Effective personal allowance: £2,570.

Sacrifice £20,000 to bring ANI to £100,000. The full £20,000 falls in the 60% zone. Tax saving: 60% × £20,000 = £12,000. NI saving: 2% × £20,000 = £400. Total saving: £12,400. Net cost of the £20,000 contribution: £7,600. That is 38p in every pound from take-home, or a 62% immediate return on every pound of net pay reduction.

Note: this calculation assumes no other adjustments such as Gift Aid. ANI is gross salary minus pension sacrifice minus Gift Aid donations and some other deductions. Significant Gift Aid donations also reduce ANI and may mean less sacrifice is needed to clear the threshold.

30 hours free childcare: a further incentive

The 30-hour free childcare entitlement for 3–4 year olds requires ANI below £100,000. Lose it and you lose 15 hours per week. Depending on your area that can be worth £5,000–£10,000 per year. Salary sacrifice that brings ANI below £100,000 simultaneously restores the entitlement and saves tax at 60% on the withdrawal band income.

For a parent with a 3- or 4-year-old and income of £103,000, sacrificing £3,000 does three things: (1) 60% income tax saving on £3,000 = £1,800; (2) NI saving = £60; (3) 30-hour childcare restored, potentially worth £5,000+. Total benefit: £6,860+ from a sacrifice that only reduces take-home by £1,140.

Using the calculator

Use our £100k salary sacrifice calculator to model the exact saving at your income level. Enter your gross salary and sacrifice amount and the calculator shows the personal allowance restored, income tax saving, NI saving and net monthly cost. For a full breakdown, use the main salary sacrifice calculator.

These calculators model England/Wales/NI rates. Scottish taxpayers face different band structures. If your income is very high and the tapered annual allowance is in play, take regulated financial advice before making large sacrifice decisions.