Two thirds of high earners are financially worse off after crossing the £100,000 income threshold due to a ‘tax trap’. A study of 500 six-figure earners revealed that 67% of them lose money, paying an effective 60% marginal tax rate and losing an average of £2,900.63 a year.

The data, commissioned by financial services app Plum, found that misunderstanding the rules is a key issue. Six in ten admitted they were ‘baffled’ about the tax impact. What’s more, 25% believe the rules for people earning over £100,000 are difficult to follow. As a result, 61% worry they might be missing out financially.

According to the research 42% believe they lost money because they didn’t understand the tax rules, and 38% believe it was because they weren’t aware of the tax thresholds.

Will Bryant, director of wealth strategy at Plum, said: “Many assume that earning more simply means taking home more, without realising how sharply their tax position can change once certain thresholds are breached.

“By the time they notice, they’re already paying more than they expected or missing opportunities to plan more efficiently.”

The study revealed 59% increased their pension contributions after going over the income of £100,000. The main reason for doing this was to save more for retirement (58%), but 29% were keen to reduce their tax bill

Will added: “Despite the ongoing uncertainty and confusion, the good news is that this is exactly the point at which independent advice and research can make the biggest difference.

“With the right guidance, high earners can understand their new position, plan ahead, using tax wrappers, like pensions, and make informed decisions rather than reactive ones.

“Seeking advice early isn’t about avoiding tax – it’s about removing uncertainty and making sure success doesn’t come with unnecessary financial stress.”

Personal Tax Allowance

Once you earn over £100,000 per year, your personal tax allowance starts reducing – for every £2 you earn over this figure you will lose £1 of your tax-free allowance until it runs out when you earn more than £125,140.

Savings Tax

You will get taxed on savings after your personal allowance is fully tapered away – high earners of over £125,140 who don’t put their savings in a tax wrapper (like an ISA) will automatically be subject to tax on the interest they earn as they become ‘additional rate taxpayers’.

‘Lifestyle Creep’

The ‘lifestyle creep’ will still leave you with the same disposable income as before – as your salary increases you will naturally ‘upgrade’ your lifestyle, such as more expensive cars or properties, but these things will eat into your disposable income leaving you with the same, if not less, as your previous salary.

Benefits

You will lose out on benefits – these include tax-free childcare, free childcare hours, and child benefits, unless you take actions to reduce your adjusted net income, for example, paying more into your pension.