More than 2.5 million workers are projected to be caught by the £100,000 tax cliff edge by 2031, facing an effective tax rate of 62 per cent on earnings between £100,000 and £125,140, according to analysis of HMRC figures. The warning comes as the frozen tax thresholds remain in place under the Labour government, with no commitment from Andy Burnham or Chancellor John Healey to change them.
Frozen thresholds drive rise in high earners
The number of taxpayers paying up to 62 per cent tax on the top portion of their income is set to rise by a further 200,000 over the next four years, driven by the frozen threshold and rising wages. Former Chancellor Rachel Reeves extended the tax freeze to 2031, and current officials have not indicated any revision.
Currently, an estimated two million taxpayers earn above the £100,000 threshold. HMRC figures indicate this will increase to 2.3 million over the next three years, with the total reaching 2.5 million by 2031.
How the 62% tax trap works
The 62 per cent effective rate applies to the income band between £100,000 and £125,140. In this band, the employed or self-employed experience an income tax rate of 60 per cent, and when national insurance contributions of 2 per cent are included, the effective rate reaches 62 per cent.
This occurs because for every £2 earned over £100,000 per annum, the taxpayer loses £1 worth of the £12,570 tax-free personal allowance. The tax rate reverts to the additional rate of 45 per cent only after the entirety of the personal allowance has been eroded, which happens on income above £125,140. For comparison, the basic rate is 40 per cent for earnings between £50,271 and £125,140.
Threshold frozen since 2010
Michael Healy, of IG, commented: “The £100,000 threshold is becoming increasingly detached from reality. It has been frozen since 2010, a time when Gordon Brown was our prime minister and Gary Neville still played for Manchester United. Wages and inflation have risen sharply since that distant time, meaning millions more people have been dragged into a tax trap, or otherwise stunting their career development to avoid it.”
IG estimates that keeping the threshold frozen will generate an additional £7bn a year in tax revenue by 2031. The Treasury has defended the policy, with a spokesman stating: "We are protecting payslips by keeping our promise not to raise income tax, National Insurance or VAT. The personal allowance is reduced for those with incomes over £100,000 to ensure support is focused where it's most needed, including funding public services."
Pension changes add to burden
Additionally, from April 2029, a £2,000 cap will apply to workplace pension contributions made through salary sacrifice before National Insurance becomes payable. This change, announced by Ms Reeves in November, is expected to raise bills for around 3.3 million workers, adding to the financial pressure on higher earners.
