More than half a million individuals now pay up to 60 percent of income tax on the top of their earnings, a record number caught in this punitive tax trap, according to Bowmore Financial Planning.
Salaries between £100,000 and £125,000 fall under this tax anomaly. While the official top rate of income tax is 45% on earnings above £125,140, the quirk of the system results in a marginal tax rate of 60% in this bracket. For every £2 you earn above £100,000, £1 is lost from the £12,570 personal allowance, and £125,140 is gone entirely. If you include National Insurance contributions, the effective rate rises to 62%.
The number of high earners subject to the 60% marginal tax rate rose by 23% in the year to April, from 436,000 to 537,000. Bowmore urged the new government to address “inequality in the income tax system”, warning that it could deter people from earning more than £100,000.
High earners face additional penalties too: earning more than £100,000 means losing tax-free childcare and cutting the 30 hours of free care available to children aged three and four, which can make a pay rise above this threshold financially unfavourable.
Mark Incledon of Bowmore commented: “With rising living costs eroding the real value of pay rises, the next government must address the tax trap for high earners. It only discourages people from working harder, increasing their productivity and ultimately generating economic growth.”
One contributing factor to the rise in the number of higher-rate taxpayers is the freeze on income tax thresholds. The top rate threshold of £50,270 has remained unchanged since April 2021, the additional rate threshold was reduced from £150,000 to £125,140 in 2023, and both thresholds are due to remain in place until 2028. This freeze creates a fiscal drag, as rising incomes push more people into higher tax brackets, effectively raising revenue without raising tax rates.
In the 1991-92 tax year, 3.5% of taxpayers paid the top 40% income tax rate, or about 1.6 million people. By 2028, about 7.8 million people — 14% of taxpayers, including one in eight nurses and one in four teachers — are expected to pay that rate, according to the Institute for Fiscal Studies.
If the upper rate had kept pace with inflation, it would be more than £55,000 today, according to the Resolution Foundation.
In 2016, Chancellor George Osborne introduced the Personal Savings Scheme, which initially exempted 95% of savers from paying tax on their interest. But with average interest rates on easy access savings accounts at 2.79%, taxpayers paying basic rates will exceed the cap by saving around £35,850, and taxpayers paying higher rates by £17,925.
In the 2020-21 tax year, fewer than 800,000 people paid taxes on the interest on their savings. That number will rise to more than 2.7 million in the 2023-24 tax year due to higher interest rates, according to AJ Bell.
A Treasury spokesperson said: “We are committed to keeping taxation for workers as low as possible while remaining fiscally responsible. That is why we have pledged not to increase income tax, national insurance or VAT.”