The effective income tax rate in the UK (excluding Scotland) for those earning £100,000 to £125,140 is 60% -because they lose their personal allowance of £12,570 at the rate of £1 for every £2 of adjusted net income above £100,000.
The number of people pulled into this 60% tax trap has soared by 18% to 634,000 in the last 12 months, while over four million now pay higher rate tax. The figure is up from 537,000 in 2023, while just two years ago there were only 436,000 taxpayers paying an effective tax rate of 60%.
The problem is set to worsen as more taxpayers are drawn into this earnings bracket with frozen thresholds creating a massive fiscal drag. The Chancellor, Rachel Reeves, has no plans to remove the freeze before 2028.
Many feel it surprising the government chose to not address this in the latest Budget – the issue is well known by HM Treasury officials.
The tax trap is seen as a disincentive to hard work, taxpayers could avoid going for promotions or even taking pay rises if they know they will be hit by the 60% rate.
Possibly, the easiest option to avoid this punitive 60% tax rate is to make voluntary pension payments to take the adjusted net income under the £100,000 threshold. Alternatively, taxpayers could donate to charity to cut taxable income to under £100,000 and get tax relief. Another option is to use salary sacrifice to give up part of your salary for a non-cash benefit such as childcare vouchers or private medical insurance. A combination of the options is possible.
Taxpayers could also look at investing in SEIS / EIS investments that have obtained advanced assurance from HMRC to reduce their tax bills.
It is small consolation that higher rate taxpayers only pay a national insurance contributions rate of 2% over the higher rate threshold of £50,271!
Peter Nichols – Tax Director
BFN Accounts & Tax Limited