Why a Pay Rise Can Leave You Worse Off (and How to Fix It)

The Fear Is Real, But It's Not the Whole Picture

A pay rise sounds like unambiguously good news, until someone mentions that earning more can mean losing your personal allowance, your child benefit, or a chunk of your savings allowance. That fear stops some people from asking for a raise, or makes them nervous about accepting one, and it isn't irrational. The UK tax system has several points where an extra pound of salary triggers the withdrawal of something worth a lot more than a pound.

But the answer usually isn't to turn down the money. It's to understand exactly where the thresholds sit, and to know that pension contributions are the main lever most employees already have to manage which side of them they land on.

Where the Cliff Edges Actually Are

The Personal Allowance Taper: £100,000 to £125,140

Everyone gets a £12,570 personal allowance, the slice of income taxed at 0%. Once your adjusted net income passes £100,000, that allowance shrinks by £1 for every £2 you earn above the threshold. By £125,140 it's gone completely.

Inside that band, every extra pound is taxed at 40% income tax as normal, plus you lose 40p of allowance that would otherwise have been tax-free, which works out at roughly 60p in tax for every extra pound earned. Add employee National Insurance and the effective marginal rate creeps close to 62%. It's the single most punitive band in the UK tax system, higher than the 45% additional rate that applies above £125,140.

A pay rise from £95,000 to £108,000 looks like a straightforward £13,000 gain. In practice, the portion between £100,000 and £108,000 is taxed at close to double the rate the rest of the rise is.

The High Income Child Benefit Charge: £60,000 to £80,000

If either parent's adjusted net income passes £60,000, part of the household's child benefit starts getting clawed back through the tax system. By £80,000, it's gone entirely. It doesn't matter which parent earns more, or whether the other parent earns nothing at all; it's the higher earner's individual income that's tested.

For a family with two children, child benefit is worth around £2,212 a year. A pay rise that pushes one parent from £58,000 to £65,000 doesn't just add tax on the extra £7,000, it starts clawing back a benefit the household was previously getting in full.

The 30 Hours of Free Childcare: A Cliff, Not a Taper

This one doesn't taper gently, it just stops. From April 2026, working parents of children aged 9 months to 4 years are entitled to 30 hours of funded childcare a week, but only if both parents have an adjusted net income under £100,000. Cross that line by £1 and the whole entitlement disappears, not just the bit above £100,000. For a family with two pre-school children in nursery, that can be £15,000 to £25,000 a year of childcare support gone at once.

The Personal Savings Allowance

Basic-rate taxpayers can earn £1,000 of savings interest a year tax-free. Cross into the higher-rate band above £50,270 and that shrinks to £500. Cross into the additional-rate band above £125,140 and it disappears completely. With savings rates higher than they've been in years, someone with £40,000 in an easy-access account earning 4% could be looking at £1,600 of interest, more than enough to notice the allowance shrinking.

Marriage Allowance

Marriage Allowance lets a non-taxpayer transfer £1,260 of their unused personal allowance to a basic-rate-taxpayer spouse, worth up to £252 a year. It only works while the higher earner stays a basic-rate taxpayer. A pay rise that pushes them past £50,270 ends the transfer, on top of whatever tax the rise itself creates.

How to Cut the Bill Instead of Losing the Allowance

None of this means a pay rise should be turned down. It means the extra income can be managed so more of it stays out of these bands, rather than sitting inside them and being taxed at the punitive marginal rate.

Pension contributions bring adjusted net income back down. This is the main tool available to most employees. Contributions made via salary sacrifice, or relief-at-source contributions grossed up and declared, reduce adjusted net income pound for pound, which is exactly what all of the thresholds above are measured against. Someone whose pay rise takes them from £95,000 to £108,000 can sacrifice the £8,000 above £100,000 straight into their pension, keeping their adjusted net income at £100,000, their full personal allowance, and their childcare hours, all while that money still grows for retirement rather than disappearing in tax.

Salary sacrifice goes further than a standard pension contribution, because it also comes off National Insurance, not just income tax, for both the employee and the employer. Some employers pass their own NI saving back into the pension too. It's worth asking HR whether that's on offer.

This has a ceiling. Pension contributions are capped by the annual allowance, £60,000 a year for most people, or as little as £10,000 if the Money Purchase Annual Allowance has been triggered by already flexibly accessing a pension. Contributions above the allowance lose their tax relief and can trigger a charge, so a very large pay rise or bonus can't always be sheltered in full through pension contributions alone.

Gift Aid donations reduce adjusted net income as well. A donation to a registered charity, grossed up for basic-rate tax, comes off the same adjusted net income figure used for the personal allowance taper and the child benefit charge. It's a smaller lever for most people than pension contributions, but it stacks with them.

Timing matters for one-off amounts. A bonus or a lump sum that lands in a single tax year can push adjusted net income over a threshold even if income in most other years sits comfortably below it. Where an employer allows it, some people ask to have a bonus paid into a pension directly rather than through payroll, which keeps it out of adjusted net income for the year it's paid rather than the year it's earned.

Checking the tax code after a raise is worth doing regardless. HMRC doesn't always update tax codes promptly after a pay change, and an out-of-date code can mean paying too much or too little for months before it's corrected.

The Bit That's Easy to Miss

A pay rise into one of these bands rarely shows up as an obvious loss on a payslip. It shows up as a smaller-than-expected increase in take-home pay, a child benefit payment that quietly drops, or a self-assessment bill that arrives months later for the High Income Child Benefit Charge. Most people only notice the effect once it's already happened, at which point the tax year the pay rise landed in can't be changed retroactively.

Working out whether a pay rise sits inside one of these bands, and how much of it a pension contribution could shelter, is a calculation worth doing before the money arrives rather than after.

This isn't financial advice. Scenarios isn't FCA-authorised and isn't a regulated adviser. Whether to increase pension contributions, use salary sacrifice, or restructure how a bonus is paid depends on your employer's scheme rules, your other income, and your wider financial position. Those are exactly the questions a regulated adviser or accountant is paid to work through with you.