Rachel Reeves urged to reform 60% tax entice that can catch 2.1MILLION this 12 months, as OBR says it’ll take a look at excessive marginal charges

The government has been urged to take urgent action to end the 60 per cent tax trap, expected to catch more than 2million people this tax year.

Investment platform IG has added its voice to calls for reform to the removal of the personal allowance, which creates a sky-high marginal income tax rate between £100,000 and £125,140.

It said that frozen tax and childcare thresholds are preventing people from investing and damaging aspiration.

Meanwhile, the Office of Budget Responsibility said yesterday alongside the Spring Statement that it would look at the tax burden and whether high marginal tax rates are holding back the economy.

The £12,570 tax-free personal allowance is removed at a rate of £1 for every extra £2 earned above £100,000, until it is entirely gone at £125,140.

With the £100,000 threshold frozen since its introduction in 2010, the number of workers falling into the 60 per cent tax trap has swollen.

A total of 2.1million people will lose some or all their tax-free personal allowance in the 2026 to 2027 tax year, according to a Freedom of Information request by financial advice firm NFU Mutual by HMRC.

Of those, there are 801,000 people earning between £100,000 and £125,140, who will see 60 per cent of their next pound earned lost to income tax.

Meanwhile, the remaining 1.26million people will lose their entire personal allowance.

The 60 per cent tax trap is compounded by the loss of 30 hours free childcare if one parent’s income rises above £100,000 and by the 9 per cent of income taken on top of tax for those who have student loan debt.

Half of workers say they are not able to invest enough to build wealth due to tax and financial pressures, a survey from IG revealed.

Among those with nursery-age children, this rises to 92 per cent. Most of these families say they would immediately invest more if they did not lose childcare support when crossing the £100,000 threshold.

IG says Rachel Reeves should consider who important this cohort is to growing UK retail investing, a stated aim of the Chancellor’s, as they are typically mid-career professionals with rising earnings and the potential to save.

The 60 per cent tax trap has a chilling effect on aspiration, as four in five households with higher earners take action to avoid crossing the £100,000 threshold, with nearly a third reducing their hours, 28 per cent turning down a promotion, and roughly a quarter refusing a bonus or pay rise.

Many pay extra money into pensions, as this can reduce their taxable income below the threshold. While this boosts their retirement saving it costs the government money in pension tax relief and has an impact on the economy through reduced spending.

As part of its economic and fiscal outlook, revealed alongside the Spring Statement yesterday, the OBR said it would undertake ‘further analysis’ of marginal tax rates relative to other countries in a report likely to be released in the summer. 

The addition of 2 per cent national insurance reduces the amount workers keep from their next pound earned to just 38p.  

If the £100,000 personal allowance removal threshold had risen with consumer prices inflation since its introduction in 2010 it would stand at £156,000. 

When the personal allowance removal was launched as an emergency measure after the financial crisis, the top ‘additional rate’ of income tax stood at 50 per cent above £150,000. 

This rate was reduced to 45p by former Conservative Chancellor George Osborne, but Jeremy Hunt then lowered the threshold to £125,140. This means that marginal income tax rates are effectively 20 per cent, 40 per cent, 60 per cent, 45 per cent.

The 60 per cent tax trap will catch out more and more people in the coming years as incomes rise and tax thresholds remain frozen until 2031.

The Office for Budget Responsibility said after the 2025 Budget that the proportion of taxpayers expected to be in the higher or additional rate tax brackets is forecast to jump from 15 per cent in 2021/2 to 24 per cent in 2030/31.

It is estimated that there will be 1.4million additional rate taxpayers by 2028/29, up from 1.2million now. This number will have swelled by 1million since 2017/18 when there were 400,000 additonal rate taxpayers.  

Sean McCann, chartered financial planner at NFU Mutual, says: ‘It’s the ambition of many people to reach an income of £100,000, but it comes with an unexpected sting in the tail.’

How can you avoid the 60% tax trap

The 60 per cent tax trap causes higher earners to find ways to minimise the effect. There is still time in the current tax year to take steps to lessen the sting.

Using a pension is an effective way of getting around the 60 per cent tax trap, as pensions reduce taxable income. If you can reduce your income to £100,000 or below using a pension, you will be entitled to the full tax-free allowance

Mr McCann says: ‘Making the pension contribution by April 5 could help restore some or all of the tax-free allowance for the current tax year. As well as providing significant tax savings, it also has the advantage of boosting retirement savings.’

‘This can be particularly attractive for those nearing retirement in the knowledge that they can currently access the money in their pension from age 55 if needed, he added.

Employee salary sacrifice pensions are a tax-friendly way to reducing your income. 

Pension contributions via salary sacrifice are set to be capped from April 2029, with both employer and employee National Insurance payable on excess contributions over £2,000 each tax year. However, for now they remain a very tax-efficient way of investing until the changes come in so you should use them while they are still available.

An employee with earnings of £125,140 who sacrifices £25,140 of salary in return for an employer pension contribution of the same amount would see £25,140 going into their pension at a cost to them of £9,554.

This would save the employee £15,084 in income tax (60 per cent) plus 2 per cent in National Insurance Contributions (NICs) of £502. The employer would also save 15 per cent in employer NICs on the sum paid into their employee’s pension.

Electric car workplace salary sacrifice schemes are also very tax efficient, with only a small benefit in kind clawback charge. 

Charitable giving

Donations to charity are free of tax – that means if you give money from an income-taxed pot, it is refunded.

The Gift Aid scheme allows charities to claim the tax back from HMRC automatically. If you sign up to the scheme through a Gift Aid declaration, the charity can claim an extra 25p for every £1 you donate.

Charities only claim back the basic income tax rate of 20 per cent, though. If you are a higher or additional-rate taxpayer, you can ask HMRC for the remainder.

The typical annual donation amount of higher and additional-rate taxpayers is £636, according to the Charities Aid Foundation.

A 45 per cent rate taxpayer donating that exact figure to charity with a Gift Aid declaration would bring their tax bill down by £198.75.

Donations are eligible for Gift Aid so long as they are no more than four times what the donor has paid in tax that tax year.

Mr McCann says: ‘Don’t overlook gifts made to charity via Gift aid, as these reduce your income and, in some circumstances, can help restore some or all of the tax-free allowance.’’

‘Giving gifts to charity via Gift aid provides the charity with an additional boost, for every £100 gift they receive an additional £25.’