Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

How much tax do you pay on your income? 40%? Maybe 45%? Are you sure about that though? Because the higher up the tax band tree you climb, the greater the likelihood that you’ll in fact be paying much more than the marginal tax bands suggest.  

That’s because there’s an important change that takes place once you become a six-figure earner. It’s perfectly legitimate and above-board, but not very well known, so what you read next might shock you. 

In reality, if you’re a high earner in the £100k to £125k bracket, you’re likely to be paying far more tax than HMRC’s tax banding suggests. In truth, you’re likely to be paying 62% on your income. And it gets worse if you’re a high-earner who went to university from 2012 onwards and took out a hefty student loan to pay for tuition fees that shot up that year to £9,000. If you were one of them, then you could effectively be paying tax of as much as 71% on your earnings as a result. More on this later.  

How? Let’s crunch the numbers

As we all know, every worker living in the UK is subject to income tax, which is charged based on their yearly income. The rate of tax payable depends on which tax band your earnings fall into. 

England and Northern Ireland Income Tax rates and bands 2023/2024 


Rate of tax 

Taxable income   

Personal Allowance


Up to £12,570

Basic rate 


£12,571 to £50,270  

Higher rate 


£50,271 to £125,140 

Additional rate* 


Over £125,140 

*You do not get a Personal Allowance on taxable income over £125,140.
Source: GOV.UK, 14 November 2023 

Everyone has a tax-free annual personal allowance, even children. This is currently £12,570 a year. So, you'll only pay income tax on any earnings which are above the £12,570 threshold.

Once you’ve used up your annual tax-free personal allowance, you’ll pay 20% on any income up to £37,700, 40% between £37,701 and £125,140 and 45% once it goes over £125,140.  

But that doesn’t give you the full picture, because while the HMRC income tax thresholds suggest the highest rate of tax you can pay is 45%, that’s not all you have to factor in. 

First of all, there’s national insurance to add into the mix, which effectively adds another 2% in tax on top of any earnings above £12,570 a year. So even a basic rate taxpayer is paying as much as 32% (12% NICs plus 20% income tax) not just 20% on their earnings above the personal allowance threshold. 

What is even less well-known, is that once you begin earning £100,000, you start to lose your tax-free personal allowance. The impact of this is that for every £1 you earn above £100,000 you lose 50 pence of your tax-free personal allowance. Or to put it another way, each additional £1 of income effectively incurs 60p of income tax. This equates to a 60% marginal rate of tax on earnings between £100,000 and £125,140. Add in the 2% employees’ NIC you also have to pay, and you’ll see you’re actually paying a total of 62% on your hard-earned cash. 

This so-called “fiscal drag” has a very real impact on people’s take-home pay. That’s because as wages have risen, more people have slid into higher tax bands. The Institute for Fiscal Studies (IFS) estimates that by 2027-28 around another 4.5m people will be paying tax at a rate of 40p on every pound they earn.  

The Times has just launched a campaign, ahead of the Autumn Statement, calling on the Chancellor for a halt to what it has dubbed a “stealth tax”.  

Backed by The Centre for Policy Studies, one of the leading think tanks, the campaign is calling for the government to “end the stealth tax raid and increase the income tax thresholds, to soften the £100,000 cliff edge that plunges earners in the £100k-plus bracket into an effective 62% tax band.” 

A tax on ambitious 30-somethings

Now, back to those post-2012 graduates who have since gone on to earn six-figure salaries. Under the current rules of the student loans scheme, graduates must start paying back their loan when they are in a job that pays them over a certain threshold. There are various plans with different interest rates and thresholds, so check which you’re on.  

For example, graduates who went to uni and took out a loan from 2012 onwards, the requirement to start repaying kicks in when they earn more than £27,295 a year. For students who started at uni this year onwards, the requirement to start repaying will kick in when their annual earnings cross an even lower threshold of £25,000. Although that cohort won’t be affected until April 2027 at the earliest, its something for them to think about when they do. 

What’s all that got to do with income tax, you might be thinking? Well, graduates have to repay their student loan at a rate of 9% of their income over that threshold. That’s the same, whatever year they took out the loan and however much, or how little, they borrowed in total. This means that in effect, all graduates repaying student loans taken out since 2012 and currently earning over £27,295 a year are paying 9% more tax than the income tax bands suggest. And so those highest-earners, raking in over £100k and repaying student loans, are subject to an eye-watering 71% tax on their income overall. 

That 71% rate might be a very specific and relatively modest cohort in terms of numbers of people involved, but if you’re one of them, you want to take steps to mitigate the cost and lower your tax bill - so too should anyone whose income is hovering around the £100k mark.  

Here’s how to do it: 

1. Put it in your pension

The quickest and simplest way is to pay more into your pension before tax-year end, so you reduce the amount of your earnings that fall into higher tax bands. If you do this it’s a double win because you save on tax and benefit from the tax relief that you get on your contributions when they go into your pension. 

Just remember that you can only pay a maximum of £60,000 into your pension each year and still enjoy tax relief on your contributions. 

2. Use salary sacrifice

One easy way, if your employer offers it, is to use salary sacrifice to effectively ‘down-play’ your earnings to HMRC for income tax purposes. You can ‘sacrifice’ salary and put it in your pension, use it to buy childcare vouchers, opt into a cycle-to-work scheme and so on. 

However you do it, it will lower your earnings and done effectively, can keep you out of the highest tax band. With salary sacrifice the added bonus is that you also save on national insurance contributions on the bit of your salary you sacrifice too. 

3. Beware of bonuses

We all like a bonus but beware of their impact on your overall earnings. If you’re offered a bonus waiver, whereby you forfeit your bonus in return for a contribution to your pension instead, you can avoid sliding into a higher tax band and again save on national insurance too. 

Say you’re that 30-year-old graduate and your overall earnings slip into the 45% tax band. Because you’re also repaying your student loan at 9% on your earnings and National Insurance at 2%, you're paying an effective tax rate of 71% overall. So you could find only 29% of your bonus actually ends up in your pocket. Ouch! 

4. Give and do good for others - and yourself 

Don’t forget that as a higher earner, you can claim the difference between the rate of tax you pay and the basic rate on any Gift Aid donation you give to a registered charity. This is a win-win for both you and the charity you’re donating to, as they also benefit from a 20% uplift. 

5. Keep an eye on tax rule changes

And finally, the Autumn Statement is out next week, so anyone earning a few thousand pounds either side of the current tax bands would be wise to pay close attention to any changes. And, if financially beneficial, make use of the tax breaks and allowances available before the end of this current tax year. Or any that come into force at the start of the next tax year on 6 April 2024.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

Share this article

Latest articles

Why the UK is the holy grail for investors

Britain is among the most undervalued stock markets in the world

Tom Stevenson

Tom Stevenson

Fidelity International

What funds have investors been buying this year?

The most popular funds with our investors this year

Graham Smith

Graham Smith

Investment writer

The key market moments to come this year

Key dates and events that will set the agenda for the next six months.

Ed Monk

Ed Monk

Fidelity International