5 thresholds you need to know that could save you £1,000s

A pay rise is usually a cause for celebration, but it can also come with hidden costs. Once your income or estate crosses certain thresholds, you may start to lose allowances that could cost you thousands of pounds each year.

Understanding where these thresholds lie and taking the right steps to manage them can make a significant difference to your finances over the long term.

A financial planner can help you navigate the rules and structure your income and investments more efficiently, allowing you to keep more of what you’ve worked hard to achieve.

Read on to discover five thresholds you need to know about.

1. High Income Child Benefit Charge if you or your partner earns over £60,000

If you or your partner individually earns more than £60,000, you may be subject to the High Income Child Benefit Charge.

For every £200 of income above £60,000, you must repay 1% of your Child Benefit. Once your income reaches £80,000 or above, the charge equals 100% of the Child Benefit received, meaning you’re no better off financially from the payments.

There are ways to reduce or avoid the charge. For example, making pension contributions, donating through Gift Aid, or using salary sacrifice schemes can lower your “adjusted net income” and keep you below the threshold.

Even if you know you’ll have to repay the charge in full, it can still be worth registering for Child Benefit. That’s because you or your partner may qualify for National Insurance credits, which count towards your State Pension entitlement. This can be especially useful if one of you is not working while looking after the children.

A financial planner can help you determine how best to proceed with Child Benefit once your income exceeds a certain level.

2. 60% tax trap if you earn over £100,000

Most people can earn a certain amount each year before Income Tax applies — this is known as the “Personal Allowance”. In 2025/26, it’s set at £12,570.

But once your income goes above £100,000, that allowance starts to shrink. For every £2 you earn above the threshold, you lose £1 of your Personal Allowance. By the time your income hits £125,140, it’s gone completely.

This tapering effect means that the portion of income you earn between £100,000 and £125,140 is effectively taxed at 60% once you factor in the lost allowance.

One of the easiest ways to overcome this trap is to make pension contributions. By redirecting your income over £100,000 into your pension, you receive tax relief and restore some or all of your Personal Allowance.

Salary sacrifice is another way you can avoid falling into this tax trap, and it can be useful if you’ve exceeded or are nearing your Annual Allowance.

A financial planner can help you decide which is the best course of action based on your circumstances.

3. Tapered Annual Allowance if you earn over £200,000

For the 2025/26 tax year, the standard Annual Allowance, which is the maximum you can contribute to pensions each year while still getting tax relief, is £60,000.

However, if you’re a higher earner, your Annual Allowance may taper. You’ll usually be affected if both of the following apply:

• Your threshold income (all taxable income minus personal pension contributions) is over £200,000.

• Your adjusted income (your income plus all pension contributions) is over £260,000.

If that’s the case, your Annual Allowance falls by £1 for every £2 above the threshold. Under this system, your Annual Allowance can fall to a minimum of £10,000 once your adjusted income exceeds £360,000.

Salary sacrifice is often one of the most effective ways to stay below these thresholds, so it’s worth exploring what options are available to you. It’s also worth noting that you can carry forward unused Annual Allowance from the three previous tax years, which can be particularly useful if you’re close to exceeding your current-year limit.

A financial planner can help you assess your income, pension contributions, and salary sacrifice options, ensuring you maximise tax relief while avoiding unexpected charges.

4. The residence nil-rate band tapers on estates worth over £2 million

The residence nil-rate band is an additional allowance that can reduce your Inheritance Tax (IHT) liability when you pass on your main residence to direct descendants. In 2025/26, it allows you to pass on up to £175,000 in property wealth on top of the standard nil-rate band, which is currently £325,000.

However, if your estate exceeds £2 million, the residence nil-rate band tapers by £1 for every £2 above. This tapering continues until the allowance is completely lost for estates valued at £2.35 million or more.

To mitigate the impact of this tapering, you can reduce the value of your estate through lifetime gifts or by placing assets into trusts, which removes them from your estate for IHT purposes.

A financial planner can help you review your estate plan and structure gifts or trusts in a way that maximises the residence nil-rate band while ensuring you don’t compromise your retirement goals.

5. The Lump Sum Allowance limits your tax-free pension withdrawals to £268,275

The Lump Sum Allowance (LSA) sets the maximum amount of tax-free cash you can take from your pension during your lifetime. As of 2025/26, this allowance is £268,275.

Typically, when you access your pension, you can take up to 25% as a tax-free lump sum. However, the LSA sets the upper limit for all such tax-free withdrawals. If you have multiple pension pots, the total tax-free cash you take across all of them cannot exceed the LSA.

Any withdrawals above the LSA are subject to Income Tax at your marginal rate. This makes careful planning crucial, particularly for higher earners or those with large pension savings.

A financial planner can help ensure your withdrawals are structured to maximise tax-free benefits without pushing you into higher tax bands.

Get in touch

Understanding and maximising your allowances as a high earner can save you significant sums each year. A financial planner can guide you through the rules and help you build a strategy that keeps more of your wealth working for you.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.