More than half a million higher earners are facing extra financial burden from the 60 per cent tax trap, according to Andy Wood, tax expert at Tax Natives.
He discussed how the “tax trap” was a significant issue that needed addressing with frozen income tax thresholds and rising inflation worsening the situation.
With the combination of the 40 per cent higher income tax rate and the phased loss of the £12,570 personal allowance, those earning between £100,000 and £125,140 are “disproportionately impacted”, according to Wood.
“The number of people caught in the 60 per cent tax trap has increased by 23 per cent, from 436,000 to 537,000 between 2021-2023. This rise is due to frozen income tax thresholds and high inflation, which push more people into higher tax brackets,” he added.
Wood discussed how the issue was impacting parents as those earning more than £100,000 face an “extra financial burden” as they lose tax-free childcare and half of the 30 hours of free care for three and four-year-olds.
“This can result in a loss of up to £14,500 a year for those with two children, creating a counterproductive incentive to avoid pay rises,” he explained.
Frozen tax thresholds have unintentionally moved millions of taxpayers into higher tax brackets, which must be addressed, according to Wood.
He said: “Freezing tax thresholds since 2020-21 and extending this freeze until 2027-28, along with lowering the 45 per cent additional rate threshold from £150,000 to £125,140, has made the issue worse. “
Wood also pointed out how the current tax system discourages productivity and economic growth.
“When HMRC takes 60p in every pound earned above £100,000, the motivation to strive for higher earnings diminishes. This situation ultimately deters economic progress.
"The government must address this issue to ensure fairness and encourage economic productivity. The goal should be to create a tax system that rewards hard work and does not penalise individuals for earning more,” he added.
alina.khan@ft.com
