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Tax Planning for the Personal Allowance Trap
Summary
How we helped a senior manager keep £18,000 more of their income - legally and simply.
James came to us after a colleague mentioned he might be paying too much tax. Earning £130,000 a year, he was deep into the “personal allowance trap” - the band between £100,000 and £125,140 where every extra pound of income is effectively taxed at 60%, because the personal allowance tapers away at the same time. He had a workplace pension but was contributing only the minimum required for employer matching. He had no ISA, no salary sacrifice arrangement, and no idea the personal allowance trap existed. On paper, he was doing well. In practice, HMRC was taking a disproportionate share.
I’d assumed my company’s payroll just handled everything correctly. Finding out I’d been overpaying for years was frustrating - but at least we’ve sorted it now. The difference...
We started by mapping James’s full income and tax picture. The solution was straightforward but meaningful: we increased his pension contributions through salary sacrifice, which reduced his pensionable pay below £100,000 and fully restored his personal allowance. We also made use of his and his wife’s ISA allowances to begin sheltering investment returns from future tax. The changes were implemented through his employer’s payroll with no disruption to his day-to-day finances — and because salary sacrifice reduces National Insurance contributions too, his employer was supportive.
been overpaying for years was frustrating - but at least we’ve sorted it now. The difference in my take-home is significant.
- Personal allowance fully restored by bringing pensionable income below £100,000 through salary sacrifice
- Effective income tax rate reduced from 45% to 40% on the affected portion of earnings
- Take-home pay increased by approximately £18,000 per year - with no reduction in total remuneration
- National Insurance savings of around £900 per year as a further benefit of salary sacrifice
- ISA allowances for James and his wife now fully utilised, sheltering future investment growth from tax
- A simple annual review process put in place to adjust contributions if his salary changes
The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested. The information contained within this case study is for guidance only and does not constitute financial advice.
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