Over the next decade, it’s predicted that more than 3 million workers will find themselves in the 60% income tax bracket.
Some jobs at risk of crossing the six-figure mark include train drivers, who may earn over £100,000 within the next 12 years. Additionally, police chiefs and teachers could find themselves in a similar situation in about 15 years.
A just system is often thought to mean that higher earners contribute more in taxes. The Center for Policy Research suggests that over half of the additional income gained by workers should ideally remain theirs rather than go to the government.
However, that’s not the case at present. In the UK, the highest tax rate is 45% in Wales, applicable to incomes above £125,140, while in Scotland, it can reach 48%. Those earning above £100,000 annually actually pay significantly more.
Interestingly, anyone making between £100,000 and £125,140 deals with a marginal tax rate of 60%, or 62% when factoring in National Insurance.
Moreover, graduates are also burdened with student loan repayments that can take up to 9% of their salary beyond a certain threshold. This means that someone with a £100,000 salary could be taxed at a marginal rate of 71%, leaving them with only 29 pence for each additional pound earned. This situation arises because for every £2 over £100,000, £1 of the personal tax-free allowance is eliminated. By the time someone’s salary hits £125,140, their disposable income could dwindle to zero.
Parents making even just £1 above £100,000 face the loss of valuable childcare support, prompting many to turn down promotions or cut back on their hours to remain under crucial thresholds.
In total, over 2 million taxpayers are anticipated to be earning six figures in the upcoming tax year. They might not draw sympathy, especially given that the average annual income in the UK hovers around £39,000 before tax. However, critics caution that the £100,000 tax trap can have damaging effects—discouraging many from working more and stifling productivity and economic growth.
“The £100,000 threshold isn’t solely a niche issue anymore,” remarked Sean Moore from a wealth management firm. “This cliff isn’t just about high taxes; it fundamentally alters incentives. People earn less, which strongly discourages experienced professionals and families from taking on extra responsibilities or seeking higher positions.”
Significant Pressure
Approximately 265,000 taxpayers will surpass the £100,000 mark in the next decade. Projections indicate that this number will climb from 650,000 this year to over 915,000 by 2035, ultimately impacting 3,113,000 individuals.
By 2038, the average train driver is expected to earn more than £100,000 annually, according to data from the Office for National Statistics and salary inflation estimates from the Office for Budget Responsibility. They will be joined by IT directors, medical specialists, and air traffic controllers, all surpassing the threshold.
If conditions remain the same, police executives, school leaders, and financial managers are also set to enter the 60% income tax trap within 15 years.
Income tax thresholds have remained stagnant while many are being pushed into higher tax brackets as salaries increase. The basic and higher tax rate thresholds have been unchanged since 2021, with the most recent prime minister extending a freeze that was initially set to lift in 2031 at the earliest.
Previous governments have neglected to address the 60% tax trap or the challenges posed by losing childcare support. If the £100,000 threshold for removing personal allowances had been adjusted for inflation since its introduction in 2010, it would now stand at £150,000.
The situation worsens for families where one parent earns above £100,000, resulting in the loss of tax-free childcare worth £2,000 annually per child and the entitlement to up to 30 hours of free childcare for children from nine months to school age.
The standard childcare support amount has remained unchanged since 2017; if it had kept pace with inflation, it would now equate to over £130,000.
Raises and bonuses, while typically joyful, have turned financial planning into a complex puzzle for many families. Unless earnings significantly exceed the £100,000 threshold, many find themselves facing a financial shortfall.
The Institute for Fiscal Studies notes that a parent with two children under three, requiring 40 hours of nursery care in London, would need to earn over £149,000 annually just to offset the loss of childcare support. Outside the capital, the threshold drops to £137,000.
Many parents try to mitigate the issue by contributing more to their pensions, either through increasing workplace contributions or opting for salary sacrifice schemes. However, come April 2029, there’s a catch: the amount you can save toward pensions through salary sacrifice with National Insurance benefits will be limited to £2,000.
