Workers stung by a £100,000 HMRC tax trap are being put off work. The Organisation for Economic Cooperation and Development (OECD) published Foundations for Growth and Competitiveness 2026 report on Thursday, April 9.
In it, it issued a series of warnings to the Labour Party Chancellor Rachel Reeves about how tax policy may be hurting Britain’s protracted hunt for growth. It urged Ms Reeves to make Britain’s tax system “more efficient and growth-friendly”.
It argued that “distortions such as kinks in the income tax schedule weaken work incentives” – one of the most controversial examples of this is the tapering of the personal allowance when yearly earnings rise above £100,000.
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“Your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000,” UK Government website explains. “This means your allowance is zero if your income is £125,140 or above.”
It means for the income earned between £100,000 and £125,140, taxpayers face an effective marginal tax rate of 60%, Tax Assist Accounants explains.
Additionally, a parent crossing the £100,000 threshold loses childcare support worth nearly £20,000. The thresholds have been frozen since their introduction in 2010 and 2017, respectively.
The OECD also said there is “scope to improve the efficiency and fairness of the UK tax system” arguing that parts of it are complex, “leading to large compliance costs”.
“As a result, tax compliance has decreased, especially for smaller businesses with less capacities to navigate the system,” it added.
Meanwhile, it argued that VAT reliefs “are largely inefficient and regressive and property tax is based on outdated valuations”.
“Furthermore, distortions such as kinks in the income tax schedule weaken work incentives,” it continued
Its recommendations include conducting an “in-depth tax review to make the tax system more efficient and growth-friendly by reducing distortions, closing loopholes, and ending reliefs and exemptions that do not serve economic or social objectives”.
It also advocated for broadening the VAT base “by phasing out exemptions and compensate low-income households through targeted transfers”. and regularly conducting tax expenditure reviews.
