Case Study: How High Earners Lose Their Personal Allowance (2025/26)
Jun 26, 2025
Why This Case Study Matters
If you earn over £50,000, you’re already paying Higher Rate tax.
If you earn over £100,000, HMRC begins taking away your Personal Allowance — the tax-free portion of your income.
But what does this look like in practice? Let’s see through three simple examples.
Meet the Case Study Characters
Emma – £95,000 income
John – £110,000 income
Sarah – £130,000 income
These names are fictional, but the tax impact is real.
Emma: Safely Below the Threshold
Emma earns £95,000.
She keeps the full £12,570 Personal Allowance.
Her first £12,570 is tax-free.
The rest is taxed at 20% and 40%.
👉 Result: Emma’s position is stable. She’s close to the £100k threshold, but she doesn’t lose any allowance.
John: The £110,000 Earner in the Danger Zone
John earns £110,000.
He’s £10,000 over the £100,000 limit.
HMRC reduces his allowance by £5,000 (£1 lost for every £2 over).
His new tax-free amount = £7,570.
👉 John now pays 40% tax on more of his income. His effective rate is much higher than he expected.
Sarah: The £130,000 Earner Who Lost It All
Sarah earns £130,000.
She’s £30,000 over the £100,000 line.
HMRC claws back her allowance completely.
That means every pound of her income is taxable.
👉 Sarah is stuck in the “60% tax trap” — paying 40% Higher Rate tax while also losing her allowance.
Why Sole Traders Feel the Squeeze
Here’s the catch: as a sole trader, you don’t have much flexibility.
All your income is declared.
You can’t easily control how much is taxable.
Tax planning options are limited.
👉 That’s why once you cross into higher income territory, many people explore alternative structures — such as operating through a limited company.
What This Means for You
If you’re earning:
£50,000+ → You’re already in Higher Rate territory.
£100,000 – £125,140 → HMRC is clawing back your allowance.
£125,140+ → Your allowance is gone completely.
💡 Want to see how limited companies and other tax planning strategies can protect more of your income? Read our guide on [The Benefits of a Limited Company for Tax Planning].
