An extra 112,000 people are forecast to earn above £100,000 from April as wages rise and tax thresholds are frozen, meaning a record two million workers face the six-figure tax trap.
The top tax rate in the UK is, officially, 45 per cent, applying to those who earn in excess of £125,140. However, the reduction of certain allowances for those who earn over £100,000 means that those who earn between those amounts face an effective tax rate of 60 per cent – and up to 62 pence in every pound earned once national insurance and tax are factored in on that portion of their earnings.
While actual income tax rates do not change once you earn £100,000, the important factor is that this is the level at which you begin to lose your personal allowance of £12,570 on earnings, on which no tax is paid.
For those earning £100,000 or more, it reduces by £1 for every £2 you earn, meaning more of your income is taxable.
As well as gradually losing out on that allowance, parents of young children immediately lose their entitlement to 30 hours a week of free childcare, which can cost around £9,000 or more annually.
Experts have calculated that if you earn £99,000, you could end up being worse off if you receive a raise or bonus of between £1,000 and £25,000. Though it’s important to note that this would only apply in specific circumstances, such as needing to spend that full amount on childcare, rather than meaning you should immediately reject any potential raise beyond that threshold.
More people are now earning more than £100,000 due to a combination of wage growth and inflation, while continually frozen tax thresholds mean more people get pushed into higher tax bands – both real (like the higher rate from £50,271) and effective (like this one) – without necessarily feeling like their earnings have increased. This is called fiscal drag.
In reality, it means more middle-earners, rather than wealthy individuals, are earning six-figure sums without it leading to the type of financial stability or lifestyle previously associated with that type of income.
Treasury data shows 1.2m workers passed the threshold in the 2021-22 tax year, but that is expected to rise to 2.3m by 2028-29.
One way earners try to keep their taxable income below the £100,000 threshold, where possible, is to pay more of their pre-tax earnings into pension schemes, though from 2029 that is also set to face an additional cost after Rachel Reeves announced a £2,000 cap on untaxed contributions.
