Andy Burnham, the Labour MP for Makerfield who is set to become Prime Minister following Sir Keir Starmer's resignation, has been urged to address a tax system that sees some earners facing a 62% marginal rate from HMRC, according to a new report by Policy Exchange. The report, backed by former Conservative figure Sajid Javid, warns that the gradual loss of the personal income tax allowance and interactions with the benefits system create "absurdly high marginal tax rates" well above the official 45% top rate.
Marginal Tax Rates Soaring Above 100%
The report highlights that individuals earning between £100,000 and £125,140 face a marginal tax rate of 62%, up from 45%, as the Personal Allowance is tapered away. For those also repaying a student loan, the rate climbs to 71%. Worse, once income reaches £100,000, childcare subsidies worth thousands of pounds are fully withdrawn, potentially leaving someone significantly worse off after a pay rise. In such cases, the marginal tax rate exceeds 100%.
Lower down the income scale, families with children claiming Child Benefit face marginal rates of 49%, 54%, and 58% on income between £60,000 and £80,000 as the benefit is withdrawn. Similar effects occur with Universal Credit reductions as claimants' incomes rise.
Economic Impact and Complexity
The report warns that these tax quirks create a "Manhattan Skyline" effect, where marginal rates fluctuate wildly across income ranges, disincentivising hard work and risk-taking. Workers may reduce hours, turn down promotions, or lower their incomes, leading to lost economic output. The UK's tax system is described as overly complex, with calls for complete reform of stamp duty.
In the foreword, Sajid Javid notes that Britain's tax burden has reached a 70-year high. He writes: "The prize for getting these questions right is enormous. Compound growth is the most powerful force in economics. Sustained improvements in our growth, built upon over a generation, will deliver greater improvements to our country’s finances and standards of living than any one budget ever could." He adds: "Fundamentally, I believe that this is a country where talent, effort and ambition should always be rewarded. Our tax system is currently acting as a break on that - it’s time it got out of the way."
Call for Reform
Burnham, who is expected to become Prime Minister next week, faces mounting pressure to overhaul income tax, stamp duty, and other fiscal policies to eliminate these disincentives. The report urges immediate action to simplify the tax system and reduce marginal rates to encourage economic growth.
