The Tax Cake Trap 🍰🍰 (2026/27 edition)

Cake #1: The “Free Slice” Cake (the bit that causes the famous 60% sting)

Everyone starts with a free slice 🍰

HMRC gives you a free slice of cake called your Personal Allowance.
In 2026/27 it’s £12,570.

That means: normally, your first £12,570 of income is not taxed.

Then… if you earn over £100,000, HMRC starts nibbling your cake 😭

Once your income goes over £100,000, HMRC takes away your free slice:

• For every £2 you earn over £100,000, you lose £1 of your free slice.

• By £125,140, your free slice is gone (zero allowance).

Why people shout “it’s 60%!”

Because in that £100k–£125,140 zone, you get whacked twice:

1. Your extra income is taxed at 40% (higher rate)

2. And because your free slice shrinks, more of your income becomes taxable at 40% too

So a £1,000 pay bump can mean HMRC takes about £600 of it.
That’s why it feels like 60% tax on that slice.

Gold Stag translation: you earn more, but your payslip doesn’t feel happier.

Cake #2A: The Director Cake (Ltd company freelancers: salary + dividends)

How your cake is usually served

Most director-clients take:

• a small salary (nice and steady), and

• the rest as dividends (because it can be more tax-efficient).

Important: dividends still count as cake 🍰

Even though dividends are taxed differently, they still count towards the “HMRC starts stealing your free slice after £100k” rule.

So if salary + dividends go over £100,000, the Cake #1 trap can still happen.

And from April 2026, the dividend icing gets thicker 🍯

Dividend tax rates are increasing from April 2026. In plain English:

• dividends will generally be more taxed than they used to be

So if you’re a higher earner taking big dividends, that can mean:

• more dividend tax and

• a higher chance of drifting into the £100k–£125,140 “cake theft” zone

Gold Stag translation: dividends are still useful, but from April 2026 they’re a bit more “HMRC takes a bigger bite”.

Cake #2B: The Employee Cake (PAYE higher earners: salary/bonus £100k–£500k)

Your cake is usually salary + maybe a bonus 🍰

If you’re employed, your income is mainly:

• salary

• bonus

• sometimes benefits

The same trap still applies

If your total income goes over £100,000, Cake #1 kicks in and your free slice starts shrinking.

So you might notice things like:

• a bonus doesn’t feel as exciting as it should

• a pay rise gives you less “real life money” than expected

Gold Stag translation: your payslip says “congrats”, HMRC says “same to me”.

How to stop HMRC stealing your cake (simple fixes)

If you’re near or above £100k, the goal is often:

Keep your “income for HMRC’s calculator” under £100k (or closer to it)

Two common ways:

1) Pension contributions 🐷

Putting money into pension can reduce the income that triggers the allowance loss.
Meaning: instead of giving that money to HMRC, you give it to Future You.

2) Salary sacrifice (mostly employees, and some directors with the right setup)

This is like swapping a bit of salary for pension/benefits so it doesn’t count in the same way.
End result: less income hits the “cake theft” zone.

Super quick “Which cake am I?” guide

• I take a small salary + dividends → You’re on the Director Cake

• I’m PAYE salary/bonus → You’re on the Employee Cake

• Either way, if total income is £100k+ → Cake #1 matters A LOT