High earners are facing an unintended effective tax rate of up to 62%, rather than the official 45%, when their salaries surpass £100,000. This arises from the so-called “tax cliff” created by frozen income tax thresholds, which experts warn will ensnare more than 2.5 million workers by 2031 under the current Labour government.
Andy Burnham, now serving alongside Chancellor John Healey, has made no commitment to alter the frozen tax thresholds, initially set to remain unchanged until 2031 by former Chancellor Rachel Reeves.
This freeze means that as wages rise with inflation and economic growth, an increasing number of taxpayers will find themselves paying higher effective tax rates on part of their income. Specifically, another 200,000 individuals are forecasted to become subject to the steep effective tax rate in the next four years.
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The system works such that anyone earning between £100,000 and £125,140 effectively loses 62p for every extra pound earned over £100,000. This is because the personal allowance-set at £12,570-is gradually withdrawn by £1 for every £2 earned over the £100,000 threshold, leading to an effective marginal tax rate of 60%. When adding National Insurance contributions at 2%, this combined rate approaches 62%.
Currently, approximately two million taxpayers earn above the £100,000 mark, with HMRC projections indicating this will rise to 2.3 million within three years.
Once an individual’s income exceeds £125,140, the personal allowance is fully withdrawn, and the marginal tax rate reverts to the standard additional rate of 45%. For earnings between £50,271 and £125,140, the tax rate remains at 40%.
Michael Healy of investment group IG highlights that “the £100,000 threshold is becoming increasingly out of sync with reality. It has been frozen since 2010-a time long past-while wages and inflation have risen significantly since then. This has trapped millions in a higher effective tax band and may even deter career progression to avoid crossing this threshold.”
IG estimates that maintaining the threshold freeze will result in an additional £7 billion in tax revenue annually by 2031.
In related fiscal measures, Rachel Reeves announced in November that from April 2029, a £2,000 cap will be introduced on workplace pension contributions made through salary sacrifice ahead of National Insurance calculations, potentially increasing tax liabilities for approximately 3.3 million workers.
A Treasury spokesperson stated: “We are committed to protecting payslips by honouring our promise not to increase income tax, National Insurance, or VAT. The reduction of the personal allowance for those earning over £100,000 is designed to target support where it’s most needed and to fund essential public services.”