While a pay rise or windfall payment is usually cause for celebration, it can also lead to you losing certain reliefs and allowances.
This can end up costing you a significant amount and could reduce the overall efficiency of your wealth without you even knowing it. So, it’s important to be aware of these thresholds and plan accordingly.
A financial planner can guide you through the rules and work with you to structure your income and investments efficiently, ensuring you can keep more of what you’ve worked hard to earn.
Here are four allowances you may lose as your income or assets rise.
1. The 60% ‘tax trap’ (income over £100,000)
Once your income exceeds £100,000, you may encounter the 60% ‘tax trap’.
This occurs because your Personal Allowance – the portion of income you can earn tax-free – tapers at a rate of £1 for every £2 you earn over this threshold. As a result, your earnings between £100,000 and £125,140 may face an effective Income Tax rate of 60%.
Fortunately, there are strategies to minimise the impact of this, such as pension contributions, charitable donations, or salary sacrifice.
Our recently published article will give you a detailed explanation of the 60% tax trap and ways to manage it.
2. Tapered Annual Allowance (income over £200,000)
The Annual Allowance sets the maximum amount you can contribute to your pension each year while still receiving tax relief. For most people in 2025/26, this is £60,000 or 100% of your earnings, whichever is lower.
However, your Annual Allowance tapers if:
- Your threshold income exceeds £200,000 – This is your taxable income minus your pension contributions.
- Your adjusted income exceeds £260,000 – This is your income, including all pension contributions.
If either applies to you, your Annual Allowance falls by £1 for every £2 of income above the threshold. The allowance can fall to a minimum of £10,000, which will happen if you have an adjusted income above £360,000.
It’s important to remember you can carry forward any unused Annual Allowance you have from the previous three tax years.
Another strategy that can help keep your income below these thresholds is salary sacrifice, which lets you divert a portion of your salary into benefits before tax. This could include childcare, health insurance, financial protection, gym memberships, or other perks, depending on your workplace or employer.
A financial planner can help you explore salary sacrifice options and ensure you make full use of your carry-forward allowances to maximise the tax relief on your pension contributions.
3. Tapered residence nil-rate band (estates over £2 million)
Inheritance Tax (IHT) planning is another area where thresholds matter. The nil-rate band allows you to pass on up to £325,000 tax-free, while the residence nil-rate band (RNRB) provides an additional £175,000 allowance when leaving your main home to direct descendants. Making full use of these allowances is the most effective way to reduce IHT liability.
However, if your estate exceeds £2 million, the RNRB begins to taper at £1 for every £2 above the threshold, meaning estates valued at £2.35 million or more lose the RNRB entirely.
To help limit the impact of this tapering, you can reduce the value of your estate through lifetime gifts or by placing assets in trust, which removes them from your estate for IHT purposes.
A financial planner can help you structure gifts and trusts and explore other estate planning strategies, while ensuring your retirement plans are not compromised.
4. Lump Sum Allowance (maximum tax-free pension withdrawals £268,275)
When accessing your pension, you can typically withdraw up to 25% tax-free. However, the Lump Sum Allowance (LSA) caps the total amount of tax-free cash you can take over your lifetime.
For the 2025/26 tax year, the LSA is £268,275.
This may affect you if you’re a high earner or have a sizeable pension. Any withdrawals above the LSA are subject to Income Tax at your marginal rate.
So, it’s important to plan your pension withdrawals carefully to help ensure you avoid unexpected tax charges.
A financial planner can help structure your pension to maximise your tax-free benefits while ensuring your income is sufficient for your retirement goals.
Financial planning can help you remain efficient as your income increases or asset values rise
As your earnings and assets increase, you may lose certain allowances that were previously available to you. Understanding these thresholds and taking steps to manage them can save you a substantial amount each year.
An Amber River financial planner can help you structure your income, pensions, and estate efficiently, allowing you to keep more of what you earn while staying on track to achieve your long-term goals.
Get in touch
To set up an initial appointment with an Amber River financial planner, please call 0800 915 0000. Alternatively, you can use our contact form to arrange an appointment.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
