OECD Issues Stark Warning Over UK's 60% Tax Trap Impacting Growth
The Organisation for Economic Cooperation and Development (OECD) has released a critical report urging Chancellor Rachel Reeves to overhaul the UK's tax system, citing a punitive 60% effective marginal tax rate that is stifling economic growth and discouraging workforce participation.
Tax Trap Discourages Workers and Harms Economy
In its Foundations for Growth and Competitiveness 2026 report published on April 9, 2026, the OECD highlighted how tax policies are undermining Britain's prolonged pursuit of economic expansion. The organization specifically pointed to distortions in the income tax schedule, such as the tapering of the personal allowance for individuals earning above £100,000 annually.
According to the UK Government website, the personal allowance decreases by £1 for every £2 of adjusted net income exceeding £100,000, resulting in a complete loss of the allowance at £125,140 or higher. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140, as explained by Tax Assist Accountants.
Additional Financial Burdens and Frozen Thresholds
The report further detailed that parents crossing the £100,000 threshold also forfeit childcare support valued at nearly £20,000. Notably, these thresholds have remained frozen since their implementation in 2010 and 2017, exacerbating the financial strain on households amid inflation and rising living costs.
The OECD emphasized that the current tax framework is not only complex but also leads to significant compliance costs, particularly for smaller businesses with limited resources to navigate the system. This complexity has contributed to a decline in tax compliance across the board.
Call for Comprehensive Tax Reform
To address these issues, the OECD made several key recommendations:
- Conduct an in-depth tax review to enhance efficiency and growth-friendliness by reducing distortions, closing loopholes, and eliminating ineffective reliefs and exemptions.
- Broaden the VAT base by phasing out exemptions while compensating low-income households through targeted transfers.
- Regularly perform tax expenditure reviews to ensure the system remains fair and effective.
The organization argued that VAT reliefs are largely inefficient and regressive, and property tax is based on outdated valuations, further hindering economic progress. By implementing these reforms, the OECD believes the UK can create a more equitable and stimulating tax environment that supports long-term growth and competitiveness.
