More than 1.9 million people could lose out
More than 1.9m are set to lose all or part of their tax-free personal allowance in the current tax year(Image: draganab via Getty Images)
1.9 million taxpayers face losing all or part of personal tax allowance this year
More than 1.9m are set to lose all or part of their tax-free personal allowance in the current tax year, it has been revealed. And the “tax trap”, which has been brought about by a freeze on tax thresholds that first came in in 2021-22, could see some paying 60% on extra earnings, experts warn. Some 1.18 million people will have their entire £12,570 allowance stripped away in 2025-26 – up from 1.09 million in 2024-25.
Another 752,000 will lose part of it, up from 682,000 the year before.
People affected by tapering of personal allowance
Estimates for people with income over £100,000 within personal allowance tapering
Year
People who have had their entire personal allowance tapered to zero on income adjustment, estimated thousands
People who have had part of their personal allowance tapered based on income adjustment, estimated thousands
2024-25
1,090
682
2025-26
1,180
752
2026-27
1,260
801
- Source FOI HMRC (Feb 2025)
The tax trap warning comes as more taxpayers are being dragged into the 45% income tax band. By the 2026-27 tax year, the total expected to lose all or part of their allowance will top 2 million.
The current tax regime has created a cliff edge for anyone earning over £100,000. This means that every £2 of income above that threshold knocks £1 off the tax-free allowance.
As a result, someone earning between £100,000 and £125,140 is effectively taxed at a whopping 60% – plus 2% national insurance – leaving workers with just £38 of every £100 earned.
The Office for Budget Responsibility has said the problem will only get worse, forecasting that the proportion of taxpayers in higher or additional rate bands could jump from 15% in 2021-22 to 24% by 2030-31.
How to escape the 60% trap
Chartered financial planner Sean McCann of NFU Mutual said: “It’s the ambition of many to reach an income of £100,000, but it comes with an unexpected sting in the tail. Making pension contributions by April 5 can restore some or all of your tax-free allowance for the current tax year.”
Contributions to pensions reduce taxable income. For example, someone earning £125,140 who ‘sacrificed’ £25,140 of salary into a pension would pay just £9,554 out of pocket while saving £15,084 in income tax and £502 in national insurance. Employers also save on their NICs.
Mr McCann added that charitable giving can also help. He said: “Gifts to charity via Gift Aid reduce your taxable income and can restore some or all of the allowance. Plus, for every £100 you give, the charity gets an extra £25.”
With tax thresholds frozen until 2031, taking action now could save thousands and boost retirement or charitable contributions at the same time.
