If your income exceeds £100,000 in any tax year, you are in a band that most financial advisers do not explain clearly. For every £2 you earn above £100,000, you lose £1 of your personal allowance. The result is an effective marginal tax rate of 60% on income between £100,000 and £125,140.
This is not a loophole or an edge case. It is the standard UK income tax system, and it affects every founder, director, and professional who extracts income at this level.
What the numbers look like
Your personal allowance is £12,570. It disappears entirely once your income reaches £125,140. The taper removes £1 of allowance for every £2 of income above £100,000. That means the £25,140 band between £100,000 and £125,140 is taxed at 40% on the income itself, plus an additional 20% on the personal allowance lost. 60% in total.
On £125,000 of income, the tax cost of the final £25,000 is £15,000. On £100,000 it would have been £10,000. The extra £25,000 earned costs £15,000 in tax. You keep £10,000. That is a 60% effective rate.
Why this is a structural problem, not a salary problem
The instinct is to reduce salary. But salary is only one extraction route. If you are also taking dividends, rental income, or interest from a director's loan, all of it counts toward your adjusted net income for the taper calculation. Reducing salary while leaving other income streams in place does not solve the problem, it moves it.
The correct approach is to address the extraction architecture. A group structure with a holding company allows profits to be retained at corporation tax rates (25%) rather than extracted at personal rates (60% effective). Capital can compound inside the structure and be extracted at a time and in a form that does not trigger the taper.
The pension contribution route
Personal pension contributions reduce your adjusted net income for taper purposes. A £25,000 pension contribution made in the year your income reaches £125,000 can restore your full personal allowance and reduce your effective tax rate from 60% back to 40%. This is a legitimate and widely used approach, but it is a deferral, not a solution. The capital is locked until retirement age.
What a structural approach looks like
The founders who solve this permanently are not the ones who reduce their salary. They are the ones who change where the profit sits. A holding company retains profits at 25%. A family investment company can distribute income to a spouse or adult children at their marginal rates. Share class design can redirect dividend income to family members who are not in the taper band.
None of this requires offshore structures or aggressive planning. It requires the architecture to be in place before the income is earned.
The cost of waiting
If your income has been in the £100,000 to £125,140 band for three years and you have not addressed the taper, the cost is approximately £15,000 per year in avoidable tax. Over three years, that is £45,000 that a different extraction structure would have retained.
The Capital Audit identifies whether your current extraction architecture is creating a taper exposure and what the annual cost is in real numbers.
Beyond the Taper
The taper is a Stability-layer problem. Pension contributions, salary restructuring, and gift aid are the Stability-layer solutions. They work. They are also the ceiling of what standard accountancy advice addresses.
The Growth layer (retaining profits inside a holding company rather than extracting them personally) eliminates the taper problem at source. Capital that never reaches personal income is not subject to the taper.
The Expansion layer is the constitutional architecture that governs how income is structured across the group, which entity pays what, to whom, and when, so that the taper is not managed around but designed out of the founder's personal tax position entirely.