New HMRC tax threshold alert as ‘thousands will lose free childcare’ | Personal Finance | Finance
A surge in the number of UK workers earning six-figure salaries is set to push thousands more into the £100,000 tax bracket. According to estimates from HMRC obtained by Rathbones, the number of Brits earning over £100,000 is expected to exceed two million for the first time, resulting in more high earners facing the £100,000 tax threshold.
Approximately six percent of the UK’s 34 million-strong workforce will earn above £100,000 in the 2026-27 tax year, marking a 5.7 per cent increase from the current tax year’s estimate of 1.95 million.
This increase follows Chancellor Rachel Reeves‘ decision to freeze income tax thresholds until 2031, a move many have dubbed a “stealth tax”, aimed at raising £11bn by the end of this Parliament.
Traditionally, income tax thresholds have risen in line with inflation to prevent workers receiving pay rises to keep up with the cost of living from being pulled into higher bands.
The Office for Budget Responsibility has stated that this move would raise £8bn a year by 2029, but it also exposes thousands to “punitive marginal rates” and the loss of key benefits such as free childcare, as reported by City AM.
Once a household member earns over £100,000, free childcare hours are removed, regardless of what another household member earns.
Last year, an additional 74,000 taxpayers were ensnared in the punitive £100,000-£125,000 income bracket, known as the tax trap, according to estimates obtained by City AM via a Freedom of Information request. This represents a 12 per cent increase on last year and nearly double over five years, bringing the total to 698,000.
High Earner Not Rich Yet individuals, or HENRYs, are feeling the pinch more than ever. HENRYs, typically professionals earning around £100,000 or more with little savings or fewer assets, have been disproportionately affected by Rachel Reeves’ Budget decisions.
Those earning between £100,000 and £125,140 are taxed more heavily as the personal allowance of £12,570 decreases for every pound earned above the threshold.
Olly Cheng, senior financial planning director at Rathbones, said: “Earning £100,000 once felt like financial freedom, but today it often comes with a hidden tax sting. Frozen thresholds are inflating tax bills, dragging more people into higher bands, while inflation erodes the real value of earnings.
“This has created a generation of HENRYs – high earners, not rich yet – where those on strong salaries struggle to build wealth because of the double hit of a growing tax burden and the corrosive effect of inflation.”
Despite the increasing number of people crossing the threshold, there are strategies to mitigate the impact.
Cheng advised: “One of the simplest ways to avoid or limit the impact of the 60% income tax trap is to pay more into your pension. Doing so via salary sacrifice not only saves on income tax but also National Insurance for both employee and employer, making it a more tax-efficient way to boost pension savings compared to personal contributions.”
However, as not every workplace offers salary sacrifice, personal contributions remain a valuable option. Furthermore, a £2,000 cap is set to take effect from April 2029, meaning private pensions will become increasingly important for managing tax positions.
Charitable donations can also help reduce your income tax bill, with gift aid contributions lowering adjusted net income in the same way as pension payments.
Some workplaces also allow employees to make charitable contributions through salary sacrifice in exchange for non-cash benefits, which further reduces net income.
