More than half a million individuals are now paying up to 60 per cent in income tax on the top portion of their earnings, a record number caught in this punitive tax trap according to Bowmore Financial Planning.
Salaries ranging between £100,000 and £125,000 fall into this tax anomaly. While the official top rate of income tax stands at 45 per cent for earnings above £125,140, a system quirk results in a marginal tax rate of 60 per cent within this income bracket. For every £2 earned above £100,000, £1 of the £12,570 personal allowance is lost, disappearing entirely by £125,140. Including national insurance contributions, the effective rate rises to 62 per cent.
The number of higher earners subject to the 60 per cent marginal rate rose by 23 per cent in the year leading up to April, increasing from 436,000 to 537,000. Bowmore has urged the new government to address this “inequality in the income tax system,” warning it could deter individuals from earning beyond £100,000.
High earners also face additional penalties: earning over £100,000 results in the loss of tax-free childcare and a reduction in the 30 hours of free care available for three and four-year-olds, potentially making a pay rise above this threshold financially disadvantageous.
Mark Incledon from Bowmore commented, “With the high cost of living eroding the real value of salary increases, the incoming government must address the tax trap for higher earners. It only disincentivises people from working harder, being more productive, and ultimately generating economic growth.”
One contributing factor to the increased number of higher-rate taxpayers is the freeze in income tax thresholds. The £50,270 higher rate threshold has remained unchanged since April 2021, and the additional rate threshold was reduced from £150,000 to £125,140 in 2023, with both thresholds set to remain until 2028. This freeze leads to fiscal drag, where rising incomes push more people into higher tax brackets, effectively increasing revenue without raising tax rates.
The 40 per cent higher income tax rate was paid by 3.5 per cent of taxpayers in the 1991-92 tax year, roughly 1.6 million people. By 2028, it is projected that about 7.8 million people—14 per cent of taxpayers, including one in eight nurses and one in four teachers—will be paying this rate, according to the Institute for Fiscal Studies.
Had the higher rate threshold kept pace with inflation, it would exceed £55,000 today, according to the Resolution Foundation.
The personal savings allowance, introduced in 2016 by then-Chancellor George Osborne, initially exempted 95 per cent of savers from paying tax on their interest. However, with average interest rates on easy-access savings accounts now at 2.79 per cent, basic-rate taxpayers would breach the limit with savings of about £35,850, and higher-rate taxpayers with £17,925.
In the 2020-21 tax year, fewer than 800,000 people paid tax on their savings interest. This number surged to over 2.7 million in the 2023-24 tax year due to rising interest rates, according to AJ Bell.
A Treasury spokesperson stated, “We are committed to keeping taxes on working people as low as possible while maintaining fiscal responsibility. That’s why we’ve pledged not to raise income tax, national insurance, or VAT.”