A boost to your income or a sudden increase in your wealth is usually good news, but it can come with consequences.
As your finances grow, certain allowances begin to taper or disappear altogether, which can have a bigger effect than you might think.
As such, it’s important to understand what these thresholds are and to plan for them in advance, so you can factor them into your wider strategy. This can help you avoid unnecessary tax charges and keep more of what you earn.
Read on to discover five allowance thresholds you should know about.
1. High Income Child Benefit Charge when your earnings exceed £60,000
If you (or your partner) earns more than £60,000, the High Income Child Benefit Charge may apply.
For every £200 of income above £60,000 you must repay 1% of your Child Benefit, so at £80,000, you will have to repay the full amount.
If you want to keep the Child Benefit, certain strategies can help lower your adjusted net income and potentially keep you below the threshold, including:
- Making additional pension contributions
- Donating through Gift Aid
- Salary sacrifice options.
Even if you expect to pay the charge in full, it can still be worthwhile to claim Child Benefit, as doing so can help secure National Insurance credits for you or your partner. This means you can protect your State Pension record if a parent is out of the workforce while caring for children.
A financial planner can guide you through your options regarding Child Benefit and help you decide on the most practical and efficient approach once your income exceeds the limit.
2. Loss of the Personal Allowance once income exceeds £100,000
The Personal Allowance is the amount you can earn before paying any Income Tax. In the 2025/26 tax year, the standard threshold is £12,570.
However, once your income rises above £100,000, this allowance begins to taper.
For every £2 you earn over the threshold, you lose £1 of the Personal Allowance. This means that by the time your income reaches £125,140, the allowance is gone, and all of your income becomes taxable.
Because of this, the income you earn that falls between £100,000 and £125,140 is effectively taxed at 60%.
The simplest way to mitigate this is through pension contributions, which reduce your taxable income and can help reinstate some or all of your Personal Allowance. Salary sacrifice can also be useful and may be more efficient depending on your circumstances.
A financial planner can assess your situation and recommend the most tax-efficient approach.
3. Tapering of the Annual Allowance when your income rises above £200,000
The Annual Allowance limits how much you can pay into your pension each year while still receiving tax relief.
For 2025/26, the standard limit is £60,000 or 100% of your earnings, whichever is lower. However, once your income exceeds certain levels, this allowance starts to reduce.
The taper applies if both of the following conditions are met:
- Your threshold income is more than £200,000 – This is your taxable income minus any personal pension contributions.
- Your adjusted income exceeds £260,000 – This is your taxable income plus all pension contributions, including employer payments.
If you pass these limits, your Annual Allowance decreases by £1 for every £2 of adjusted income above £260,000. The allowance can be reduced to a minimum of £10,000 once your adjusted income reaches £360,000.
It’s important to make use of the “carry forward” rule if you’re affected by this. Carry forward allows you to use any unused Annual Allowance from the previous three tax years.
You can also explore salary sacrifice to help keep your income below the thresholds and maintain your full allowance.
A financial planner can help you optimise your pension contributions and apply strategies to preserve your Annual Allowance.
4. The residence nil-rate band reduces when your estate exceeds £2 million
The residence nil-rate band is an extra Inheritance Tax (IHT) allowance that applies when you leave your main residence to direct descendants. In 2025/26, it lets you pass on up to £175,000 in property in addition to the standard £325,000 nil-rate band.
However, the residence nil-rate band begins to taper once your estate is valued at more than £2 million. For every £2 your estate exceeds the threshold, £1 of the allowance is removed. So, by the time your estate reaches £2.35 million, the allowance disappears entirely.
To help preserve the residence nil-rate band, you need to reduce the value of your estate. You can do this by making lifetime gifts or moving assets into trust, though it’s important to do so carefully as this could affect your wider financial plan.
A financial planner can work with you to develop a comprehensive estate plan that could include gifting or trust strategies, while ensuring your approach aligns with your long-term goals.
5. The Lump Sum Allowance caps your tax-free pension withdrawals at £268,275
Typically, you can take up to 25% of your pension pot as tax-free cash. However, the Lump Sum Allowance places a lifetime limit on how much tax-free money you can access.
For 2025/26, this cap is set at £268,275. Any withdrawals above this figure are treated as taxable income and charged at your marginal Income Tax rate.
This makes it crucial to plan your pension withdrawals, especially if you’re a higher earner or have a large pension.
A financial planner can help you create a plan that structures your withdrawals so you make the most of your tax-free lump sum while keeping your overall tax bill as low as possible.
To speak to a financial planner, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
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.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, or trusts.
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.
