The Most Expensive £1 You’ll Ever Earn

Sometimes earning that extra pound feels like a win, until you realise it’s the most expensive £1 you’ll ever earn.  Hidden within our tax system are “cliffs” and “traps” where a small rise in income can trigger big losses in allowances and benefits.

It’s not just about tax bands.  It’s about what else changes when you cross into a different bracket.

Child Benefit

From 6 April 2024, the High Income Child Benefit Charge (HICBC) now starts when one partner’s adjusted net income exceeds £60,000.

• You’ll lose 1% of your Child Benefit for every £200 earned over £60,000.

• By the time you reach £80,000, it’s all gone.

That means an extra £1 could cost 11% in HIBC, as well as the 40% tax and 2% national insurance.

Tax-Free Childcare

This is only available if each partner earns under £100,000. If either of you earn £1 over that, and the entire benefit is lost which is potentially worth up to £2,000 per child per year – that’s an eye watering marginal tax rate!

Marriage Allowance

For married couples or civil partners, the Marriage Allowance allows the lower earner to transfer 10% of their Personal Allowance to the higher earner, saving up to £252 a year! However, it’s only available if the higher earner’s income stays within the basic rate band (under £50,270).

Go £1 over, and you will lose the entitlement completely, turning that extra £1 into a £252 loss in household tax savings.

Losing the Savings Allowance

Another hidden penalty comes when your income pushes you into a higher tax band.

The Personal Savings Allowance (PSA) gives:

• £1,000 of tax-free savings interest for basic-rate taxpayers.

• £500 for higher-rate taxpayers.

• £0 for additional-rate taxpayers (income over £125,140)

That means crossing a tax threshold can instantly halve, or completely remove, your tax-free savings interest.

For example, if your total income rises and nudges you into the higher-rate band, you lose £500 of savings interest tax-free allowance and now pay 40% tax on that £500 = £200 extra tax, for only £500 more income.

Personal Allowance Taper

Once income exceeds £100,000, you lose £1 of your tax-free allowance for every £2 you earn above that level, creating an effective tax rate of around 60% on income between £100,000 and £125,140. 

As with lots of things, there are rumours this may change in the Budget, but we can only wait and see if that happens.

How to Spot the Traps

You can only avoid the pitfalls if you know where they are:

• Keep an eye on your income but not just salary, it includes dividends, savings interest, and certain benefits.

• Watch for one-off events such as bonuses, redundancy pay, dividends or interest.

• Review annually, thresholds are frozen until 2028, so inflation pushes more people into higher tax zones each year.

What You Can Do About It

With a bit of planning, that “expensive pound” can become a smarter one:

• Pension contributions reduce adjusted income, preserve benefits, and build retirement savings.

• Gift Aid donations lower taxable income while helping good causes.

• Salary sacrifice for pensions or electric cars can be tax-efficient.

• Timing matters: deferring a bonus or dividend into the next tax year can help stay below a key threshold.

• Couple strategy: where possible, share income-producing assets to spread income evenly — but take advice first if you’re not married or in a civil partnership.

Why It Matters

This isn’t about avoiding tax.  It’s about avoiding surprises.

Earning more should always feel rewarding, not punishing.

By knowing where the cliff edges are, you can plan your income so that the next £1 you earn really is worth earning.

Sometimes the smartest financial move isn’t earning more, it’s keeping more of what you’ve already earned.

Written by Heather Langtree