Half a MILLION caught in 60% tax trap after earning £100,000

More than half a million people pay 60 percent income tax on the next pound they earn.

According to Bowmore Financial Planning, more people than ever are being hit by the 60 per cent tax trap, which affects people earning between £100,000 and £125,150 a year.

While the official top income tax rate is 45 per cent on income above £125,140, ​​the abolition of the personal exemption above £100,000 means there is an even higher marginal rate just below that.

This is because for every extra £1 earned between £100,000 and £125,150, 50p is deducted from the tax-free personal allowance, changing the 40 per cent higher income tax rate to 60 per cent.

While there are other cases where the abolition of allowances impacts income, such as the child benefit trap, the 60 percent rate created by the abolition of the personal exemption is a rate that is baked into the income tax system.

This creates a sky-high marginal tax rate, the term for the rate paid on the next pound earned.

This means that income tax rates start at 20 per cent, rise to 40 per cent and then rise to 60 per cent between £100,000 and £125,150, before falling again to 45 per cent above that.

These rates only apply to income tax, excluding national insurance.

This means that someone earning £100,000 would lose 60 per cent of a £5,000 pay rise in tax, while someone earning £200,000 would lose just 45 per cent.

According to Bowmore, the number of taxpayers paying this higher rate has risen by 23 percent in the past year, from 436,000 to 537,000, as inflation pushes up wages.

It has called on the government to take “urgent measures to address this inequality in the income tax system”.

Meanwhile, the number of taxpayers whose incomes rose due to the 60 percent tax cut and who now pay the additional 45 percent tax rate has also increased dramatically.

Official figures show that the number of additional taxpayers has risen from 950,000 to 1.13 million over the past year.

This is almost double the 587,000 people who paid the top rate in 2022/23, after former Chancellor of the Exchequer Jeremy Hunt reduced the tax threshold from 45p to £125,140 from £150,000.

Higher income tax rates in Scotland make the situation worse north of the border, where the higher tax rate of 45 per cent applies above £75,000.

The tax attack through frozen thresholds

It’s not just people earning between £100,000 and £125,150 who are facing higher taxes. The freezing of income tax thresholds, combined with high inflation, has led to a massive tax theft.

By keeping the basic rate threshold at £12,570, a greater proportion of people’s income will be taxed at 20 per cent.

At the same time, the higher rate threshold of £50,270 has not changed since April 2021, while the additional rate threshold has been reduced to £125,140.

The £100,000 threshold at which the personal exemption is abolished has not changed since it was introduced 15 years ago. If it had risen in line with inflation it would have been £153,000.

Figures from the Tax and Customs Administration show that 6.3 million people are paying 40 percent tax this year, compared to 6 million this year. That is almost double the number of people who paid the higher tax rate in 2010.

The Institute for Fiscal Studies expects that 8.7 million people will pay the higher or additional rates by 2028/2029.

Mark Incledon, CEO at Bowmore Financial Planning, said: ‘Achieving a six-figure salary has long been a key goal for many people.

‘We all understand that this comes with the obligation to pay more tax. Unfortunately, when HMRC deducts 60p from every pound you earn over £100,000, the temptation to get there is a lot less.

‘Because rising living costs are undermining the real value of pay rises, the new government must tackle the tax trap for higher earners.

“It just discourages people from working harder, being more productive and ultimately generating economic growth.”

Not only people with higher incomes are disadvantaged, pensioners are also affected by the frozen thresholds.

The number of people above the state pension age who pay income tax rose by 660,000 to 8.51 million.

This means that almost 9 million people aged 65 or over now pay tax on their income, compared to 4.9 million in 2010/2011.

While the state pension scheme’s triple lock ensures that pensions rise in line with inflation, earnings or 2.5 per cent, freezing the personal exemption means that a pensioner receiving a full state pension of £11,500 a year plus some private pension income will have to pay income tax.

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