Pension Tax Trap Warning: High Earners Risk Losing Over £250,000 in Retirement Savings
A stark warning has been issued to taxpayers earning just over £100,000 annually, who could forfeit more than £250,000 in retirement savings due to a significant pension "tax trap." Financial experts are highlighting how frozen income tax thresholds and the loss of key benefits are creating a perfect storm for high earners, eroding their long-term financial security.
The Growing Impact of the £100,000 Threshold
According to analysis from Rathbones, individuals caught in this so-called £100,000 tax trap stand to lose a staggering £255,358 over two decades by failing to reclaim additional relief on their pension contributions. This issue is set to affect a rapidly expanding number of people, with the total taxpayers earning £100,000 or more expected to almost double from 1.218 million in 2021/22 to 2.293 million by 2028/29.
The rise comes against a backdrop of a growing tax burden caused by frozen income tax thresholds, which are pulling more earners into higher tax bands. Crossing the £100,000 threshold triggers the tapering of the personal allowance, creating an effective marginal tax rate of 60% between £100,000 and £125,140. Additionally, parents earning over this amount can lose childcare support, worth nearly £20,000 for two children under five, compounding the financial strain.
Expert Insights on Financial Strain for High Earners
Olly Cheng, senior financial planning director at Rathbones, commented on the shifting financial landscape for high earners. "Earning £100,000 once felt like financial freedom, but today it often comes with a hidden tax sting," he said. "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."
Cheng emphasised that fiscal drag has become one of the most damaging factors affecting the cost of living for many households. "What was once considered a 'stealth tax' is now widely understood and much maligned," he added. "By 2028/29, nearly 2.3 million taxpayers are expected to earn above £100,000 – almost half a million more than the estimate for the current tax year – and for families with young children, this will be particularly painful. With bonus season approaching, what looks like a reward can quickly turn into a tax shock."
Projected Increases in High Earners and Financial Implications
Rathbones further noted that the number of individuals earning £120,000 or more is also projected to increase significantly. This figure is expected to rise by 100,000 to reach 1.4 million in 2026/27, marking a 7.7% increase from the current tax year's estimate. This trend underscores the broadening impact of the tax trap, affecting an ever-larger segment of the workforce.
The combination of frozen thresholds, high marginal tax rates, and lost benefits creates a complex financial challenge for those navigating this income bracket. It highlights the importance of proactive financial planning and awareness to mitigate potential losses and secure retirement savings effectively.
