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How to earn over £100k tax efficiently

  • Richard Jackson - 06/05/2026
How to avoid the 60% tax trap

The £100k Tax Trap:

Once your income moves above £100,000, the tax system changes in a way that isn’t immediately obvious.

Your personal allowance, currently £12,570 that you can earn tax-free, begins to disappear.

And it doesn’t taper gently.

For every £2 of income above £100,000, you lose £1 of your personal allowance.

By the time your income reaches £125,140, it’s gone completely.

Why This Creates a 60% Effective Tax Rate

That loss of allowance means more of your income is pulled into tax.

So within this band, you’re not just paying higher-rate tax on additional earnings.

You’re also being taxed on income that was previously tax-free.

The combined effect is what creates the widely referenced 60% effective tax rate.

Not because there’s a 60% tax band but because:

  • 40% tax applies to the new income
  • plus 20% effectively applies to the allowance you’ve lost

You earn more, but a disproportionate amount is taxed.

Why This Matters More Than It First Appears

It introduces a barrier to earning more.  Owner profits often continue to grow but I see many artificially holding back their drawings below the £100k threshold and effectively capping their income for years.

  • Additional earnings feel inefficient
  • Extraction decisions become cautious
  • Income starts getting managed to avoid the band

And that’s where the real issue begins.

  • Dividends get capped
  • Profit stays in the company
  • Decisions become reactive to thresholds

On paper, this looks like sensible tax management but you are creating an artificial earnings ceiling that over time will impact your potential lifestyle and money begins to build in company reserves. 

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The Trap Many Successful Founders Drift Into

Without a defined plan, the pattern tends to look like this:

Year 1–3:

  • Income capped around £100k
  • Excess profit retained

Year 4–6:

  • Retained profits become “too large to ignore”
  • Larger extraction decisions feel heavier and more complex

It’s the natural outcome of applying annual tax planning when multi-year tax planning is now needed.

Introduction to Multi-Year Tax Planning

As a company owner you have the advantage of timing your income and this can save you thousands in tax if done correctly. 

Rather than taking £125k per year consider a multi-year approach. 

Alternate your income, take £100k one year and £150k the next. 

The result? Over two years, you would save more than £5,000 in tax compared to taking £125k each year.

Simple. Legal. And highly effective.

Your next steps

If you have excess retained profits in your company and are looking for tax efficient strategies to extract the funds you can find out more about our Profit Extraction Planning service here.

There’s no need to switch accountants and the initial discovery call is free. 

More information click here   

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Dividend Errors

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Are you a business owner who would like to maximise tax savings by blending salary with dividends? If so, you might be inadvertently leaving yourself exposed to potential HMRC compliance challenges if your paperwork needs to be completed.

If you're thinking, "That's ok, my accountant takes care of that, "……err, no, they probably don't and here's why.

Your accountant will see your total drawings at the end of the year and work out the best tax treatment for the money drawn; however, you are probably taking a monthly dividend throughout the year to top up your salary. If you do this, you are overlooking one critical yet often neglected aspect, which is the need for dated individual dividend vouchers to be issued each time dividends are distributed. These vouchers serve as internal records, so they are essential for HMRC compliance.

Here's a simple litmus test for you: Have you ever received a copy of a Dividend Voucher from your accountant?

 

Dividend for the year ended {your company year end date} payable to holders registered on {date of meeting}. Date of payment {date of payment}.

Holding:

Dividend Rate:

Dividend Payable:

{number of shares held by shareholders} Ordinary Shares

£{amount} per share

£{amount = number of shares x dividend rate}

This voucher should be kept. It will be accepted by HM Revenue & Customs as evidence of a tax credit.

 

Named: RPJ Accountancy Free Tax Dividend Voucher Template

If your answer is "no," then you should take advantage of our free Dividend Voucher Template and make sure you fill it in and save it monthly.

While this might seem like an added administrative task, it's a straightforward process. Once you've set it up, it's merely a matter of changing the date and value and saving it securely so you have it readily available in case of any HMRC inquiries.

To make life easier, we offer a complimentary and user-friendly Dividend Voucher Template in Word format. To receive it, please follow these simple steps:

  • Enter your name and email address below.
  • Confirm your email address when prompted.
  • You will receive an email containing a download link for the template in Word format.
  • Once you have downloaded it, save the template and personalise it by inserting your company details in the highlighted sections.
  • Update the dates and values monthly and store a copy for your records.

This straightforward dividend documentation template ensures you have the necessary paperwork to substantiate your tax-efficient dividend and salary structures. This process significantly reduces the likelihood of administrative issues with HMRC – at least on the documentation front.

Stay safe - don't let incomplete paperwork leave your business vulnerable.

Secure your dividends today with our free, easy-to-use Dividend Voucher Template. Download HERE! (Google Docs)

Once downloaded, edit the template with your company details and save as a Master Copy to a local folder.  Then each time you declare a dividend save a opy of your master template with the date of the dividend and edit the date and value of the dividend to be recorded.  Distribute final version to shareholders receiving dividends.  

If you would like a Corporation Tax Planner (Excel) click here.