Labour’s hidden 60% tax trap that leaves 700k Brits worse off than higher earners | Personal Finance | Finance
The number of Britons paying 60% tax on some of their earnings has nearly doubled in six years, new figures show.
The squeeze affects anyone earning between £100,000 and £125,140, where the 40% higher rate of income tax combines with the loss of the tax-free personal allowance. For every £2 earned above £100,000, £1 of the £12,570 tax-free allowance disappears, creating an effective 60% tax charge. Once earnings reach £125,140, the tax rate falls back to 45%. New figures from HM Revenue and Customs (HMRC) show 698,000 people will be caught this year, up from 336,000 in 2018/19.
The surge comes as pay packets rise with inflation while tax thresholds remain frozen until at least 2028, with forecasts that Chancellor Rachel Reeves may extend the freeze until 2030 to shore up public finances.
Charlene Young, of AJ Bell, told the Telegraph: “The 60pc tax trap is a result of a pernicious policy that punishes ambition and the steep rise in people affected highlights the impact of frozen tax thresholds and allowances. For over 15 years, people earning over £100,000 have been subject to the highest effective tax rate in the UK on a slice of their income, thanks to the loss of their personal allowance.”
According to calculations, the threshold, unchanged since 2010, would now stand at £154,800 had it kept pace with inflation
The problem is worsened for parents, who lose access to free childcare hours and tax-free childcare schemes once one adult tips over the limit, wiping out access to thousands of pounds in benefits.
An AJ Bell analysis shows that a parent earning £99,000 who receives a £2,000 pay rise would see their entitlement to tax-free childcare, enhanced free-hours provision, and child benefit all reduced, while also paying more income tax. The result would be that £2,000 extra income could leave them more than £27,000 worse off overall.
To restore their disposable income and lost childcare support, AJ Bell’s calculations show their salary would need to climb to around £156,000 – an effective penalty rate of over 1,000%.
How to beat the tax trap
Experts say the rules create a strong financial incentive for parents to reduce their “adjusted net income”.
Making pension contributions is often an effective route to take, as the payments lower taxable income while increasing retirement savings.
For example, a high earner facing the cut-off could restore entitlement by diverting just £800 into a pension, which after tax relief reduces adjusted net income by £1,000. That single move could effectively recover over £27,000 in lost benefits, while also contributing to retirement savings at a fraction of the cost.
Ms Young said: “Parents might be able to re-arrange their finances to side-step the penalty by making modest pension contributions. This can improve their overall financial position as they regain lost childcare support and boost their retirement pots.”
