Tax Cliffs & Quirks

Three separate rules stack in the same band. Above £100,000 the personal allowance is withdrawn by £1 for every £2 earned, which taxes that slice at an effective 60%. National Insurance adds 2%. A Plan 2 student loan takes another 9%. Together that is 71%, and it applies from £100,000 until the allowance is exhausted at £125,140.

The striking part is the last row. Once income passes £125,140 the allowance is already gone, so there is nothing further to withdraw and the marginal rate falls. A £130,000 earner keeps 44p of their next pound; a £101,000 earner keeps 29p. Being paid £29,000 less leaves you facing the higher marginal rate.

Pension contributions are usually described as being worth your marginal rate, which implies the benefit rises steadily with income. It does not. Because salary sacrifice reduces the income the personal-allowance taper is measured against, a contribution inside the £100,000–£125,140 band buys back allowance as well as relief — and then loses that extra benefit once you are above the band.

A £200,000 earner and a £130,000 earner get identical value from the same contribution. Someone on £110,000 gets noticeably more than either. The cost curve is not monotonic, which is the opposite of how pension relief is normally explained.

Social Security is charged at 6.2% on wages up to the annual cap and nothing above it. Medicare continues uncapped. The result is a rare downward step in an otherwise rising system: earnings past the cap are cheaper at the margin than the earnings just below it.

For anyone paid monthly this shows up mid-year rather than as an abstraction: take-home rises in the month the cap is crossed and stays higher until January resets it. State income tax is excluded here so the underlying federal effect is visible on its own.

California's top rate is 12.3% and Illinois charges a flat 4.95%, which makes the outcome look obvious. It is not, because a progressive schedule charges its lowest rates first: a Californian pays 1%, 2%, 4% and 6% on successive slices before reaching anything higher, while a flat rate applies to the first dollar and the last alike.

We found the crossover by stepping through salaries in $10 increments until the sign of the difference changed. The practical consequence is that a headline top rate tells you very little about your own bill — flat taxes fall hardest on lower earners, and that is measurable rather than rhetorical.

The monthly interest on that balance is about $92. Any payment near that figure is almost entirely interest, so the small remainder that reaches the principal is what decides everything — and doubling a tiny remainder has an enormous effect on how long the debt survives.

Below roughly $92 the balance never clears at all, however long you pay. This is why the payoff curve is so steep at the bottom and so flat at the top: going from $95 to $100 saves four years, while going from $200 to $300 saves about one.