Case Study: £100,000 Company Profit

April 6, 2025 • 9 min read

Generating £100,000 in profit is a major milestone. But it also places you in the most dangerous tax zone in the UK system: The 60% Trap.

This guides explains the "Personal Allowance Taper" and how a strategic pension contribution can save you thousands.

The Danger Zone: £100k - £125,140

For every £2 of "Adjusted Net Income" you earn above £100,000, you lose £1 of your tax-free Personal Allowance.

The Math:

Income Tax Rate: 40% (Higher Rate).
Lost Allowance: 20% (Effectively paying 40% on the lost £1).
Combined Effective Rate: 60%.

Note: For dividends, the Higher Rate is 33.75%, so the effective trap rate is 33.75% + 20% = 53.75%.

Scenario A: The "Take It All" Approach (High Tax)

Director Salary: £12,570. Profit: £100,000.

1. Corporate Level

Salary Cost: £13,705 (Inc £1,135 Employer NIC).
Taxable Profit: £86,295.
Corp Tax: This falls into the Marginal Relief Band (£50k - £250k).
- Effective Rate: ~21.7%.
- Tax: £18,745.
Distributable Profit: £67,550.

2. Personal Level

You declare the full £67,550 as a dividend.

Total Income: £12,570 + £67,550 = £80,120.

Wait... you are SAFE. Because Corporation Tax took such a big chunk (£18k+), your personal income is only £80k. You are well below the £100k trap.

New Problem: Ideally, you want to extract up to £100k to use the lower bands, but the company doesn't have enough cash after tax!

Scenario B: Use Pension to Save Corp Tax

Instead of paying Corporation Tax at the Marginal Rate (26.5% on the slice above £50k), you contribute to a pension.

Gross Profit: £100,000.
Salary: £12,570.
Pension Contribution: £40,000.
Employer NIC: £1,135.
Remaining Profit: £46,295.

The Magic

Corporation Tax: Your profit is now below £50k. You pay the flat 19%.
- Tax: £46,295 * 19% = £8,796.
Dividend: You take the remaining ~£37,500.

Total Wealth Comparison

Scenario A (No Pension):

Net Cash: £63,000 (approx).
Pension: £0.
Total Wealth: £63,000.

Scenario B (Pension):

Net Cash: £46,000.
Pension Pot: £40,000.
Total Wealth: £86,000.

Result: The Pension strategy created £23,000 of extra wealth by legally avoiding Corporation Tax and keeping Personal Tax low.

Summary

At £100k profit, the main enemy is Corporation Tax Marginal Relief. It destroys your ability to extract cash efficiently. Prioritize Employer Pension Contributions to bring taxable profit down to the £50,000 sweet spot (19% rate).