Nearly 700,000 hard-working Britons could be pulled into a tax rate charged at 60 per cent from HM Revenue and Customs (HMRC), analysts warn.
Specifically, a tax anomaly affecting workers with salaries ranging from £100,000 to £125,140 results in them facing a 60 per cent effective tax rate on this portion of their income.
This rate exceeds what those earning more actually pay. Government figures reveal that 698,000 individuals currently fall within this bracket, a significant increase from 336,000 workers affected during the 2018-19 tax year.
The surge represents more than double the original number caught in this situation. The phenomenon creates a scenario where middle-high earners face a heavier tax burden per pound earned than their colleagues with larger salaries.
Analysts are sounding the alarm that a 60 per cent tax trap is impacting peoples' income
| GETTYThis mechanism operates through the gradual removal of the tax-free personal allowance of £12,570.
Workers forfeit £1 of this allowance for each £2 they earn beyond £100,000, until it completely vanishes at £125,140.
The combination of the 40 per cent higher rate tax and this allowance reduction creates the 60 per cent effective rate, with an additional two per cent for National Insurance contributions.
Above £125,140, the rate drops to 45 per cent. Frozen income tax thresholds since 2021-22 have accelerated this issue.
Fiscal drag is dragging Britons into higher tax brackets | GETTY Between 2022-23 and 2024-25 alone, 203,000 additional taxpayers entered this bracket as wages rose whilst thresholds stayed static.
Parents face particularly severe consequences when crossing the £100,000 earnings threshold.
They immediately lose eligibility for 30 hours of weekly free childcare provision and tax-free childcare support, which provides up to £2,000 annually per child.
Analysis by stockbroker AJ Bell demonstrates that an employee earning £99,000 who receives a £2,000 salary increase could face combined losses approaching £28,000 through taxation and withdrawn childcare support.
This creates a substantial financial cliff-edge where modest pay rises result in significant net income reductions for families with young children.
The policy originated in 2010 when former Labour Chancellor Alistair Darling introduced personal allowance tapering following the financial crisis.
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Rachel Reeves will unveil her Budget next month | PAAs such, the £100,000 threshold has remained unchanged since, despite inflation that would have pushed it to £154,800 today, according to NFU Mutual calculations.
Charlene Young, senior pensions and retirement expert at AJ Bell, described the trap as "a pernicious policy that punishes ambition", highlighting how frozen thresholds have expanded its reach.
Sean McCann, a chartered financial planner at NFU Mutual noted: "It used to be a career ambition to reach a £100,000 salary. But that now comes with a huge tax sting."
He advised that "the simplest way to get around it is to pay more into your pension via salary sacrifice."
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