By Chase de Vere Independent Financial Advisers, in partnership with IPSE

If you’re self-employed, managing your finances can be complex, especially when your income pushes you into higher tax brackets. For those working through umbrella companies, these challenges can feel even more pronounced, as the PAYE system offers less flexibility in managing income. However, with the right strategies, you have the possibility to mitigate tax burdens, reclaim lost benefits, and take control of your financial future.

At Chase de Vere, IPSE’s partner for independent financial advice, we understand the unique financial pressures self-employed professionals face and are here to help you navigate them.

Understanding the £100k tax trap

When your earnings exceed £100,000, the tax landscape changes dramatically. Your personal allowance – the £12,570 of income that is tax-free—starts to taper. For every £2 you earn above £100,000, you lose £1 of this allowance.

• By the time you earn £125,140, your personal allowance is completely gone.
• This creates an effective tax rate of 60% on income between £100,000 and £125,140, combining the 40% higher-rate tax and the loss of tax-free income.

The added impact on umbrella workers

For those working through umbrella companies, these tax burdens are compounded by the lack of flexibility in managing income. Unlike those operating as limited companies, umbrella workers are paid through PAYE, meaning they cannot optimise their earnings by splitting them between salary and dividends.

To make matters more challenging:

• Crossing the £100k threshold also means losing access to childcare benefits, such as tax-free childcare and free hours, which can place additional financial strain on families.
• The loss of personal allowance and childcare benefits was designed for traditional PAYE employees who often receive other perks like holiday pay, sick pay, and notice periods—benefits that umbrella workers typically do not enjoy.

This mismatch makes the tax trap particularly harsh for self-employed umbrella workers, highlighting the need for proactive financial planning.

The power of pension contributions

One of the most effective ways to reclaim your personal allowance and reduce your tax liability is by making pension contributions.

Here’s how it works:

• If you earn £125,140, contributing £25,140 into your pension reduces your taxable income to £100,000.
• This restores your full personal allowance and lowers your effective tax rate.
• The net cost of this pension contribution could be as low as £10,056, thanks to tax relief at 40%.
• If relevant, this strategy can also help you regain access to childcare benefits, creating even more financial value.

For all self-employed workers, whether operating through an umbrella company or not, pension contributions are a powerful tool to minimise tax, save for the future, and unlock additional benefits.

Why financial advice matters

Effective financial planning is essential for self-employed professionals, especially those navigating the unique challenges of umbrella work. Pension contributions aren’t just a long-term savings tool—they’re a way to lower your taxable income and make today’s finances more manageable.

At Chase de Vere, we specialise in helping self-employed professionals, including IPSE members, optimise their finances. From creating a tailored pension strategy to ensuring you’re leveraging tax relief, our independent financial advisers are here to help.

Take control of your finances today

Don’t let the £100k tax trap hold you back. Contact Chase de Vere today for expert advice tailored to your needs. Whether you’re working through an umbrella company or running your own business, we can help you navigate the tax system and achieve your financial goals.

Book a complimentary initial consultation with a Chase de Vere adviser here.

Partnered with IPSE, Chase de Vere is dedicated to helping self-employed professionals become future confident.

The information contained within this article is for guidance only and does not constitute financial advice.