Nearly 2.3mn taxpayers are set to earn over £100,000 by 2028-29, pulling them into the marginal tax rate and stripping families of childcare benefits.
According to HMRC data obtained by Rathbones, 1.8mn taxpayers earned above the £100,000 threshold in 2024-25 and this is expected to rise to 2.29mn in just four years – an increase of nearly half a million (493,000) working people.
Stephanie Ebner, a financial planning lead at Rathbones, said: “The £100,000 tax trap is one of the most baffling quirks in our tax system.
“Originally designed to target the very highest earners, after 15 years of inflation and frozen thresholds, it now ensnares thousands of professionals who were never meant to be caught. It has increasingly become a stealth tax on the middle class.
“For parents with two children under five, earning just £1 over £100,000 can mean losing childcare support worth almost £20,000.”
Ebner said these costs must be covered from post-tax income, so it is no surprise many are concerned.
“Hard-working families would need a substantial pay rise just to offset the impact of this tax trap,” she said.
The £100,000 threshold triggers the tapering of the personal allowance, creating an effective marginal tax rate of up to 60 per cent (62 per cent including national insurance) for those earning between £100,000 and £125,140.
Once the personal allowance is fully withdrawn, income above £125,140 is taxed at the additional rate of 45 per cent.
Rathbones said this “tax trap” is compounded by the fact that the £100,000 threshold for withdrawing the personal allowance has remained unchanged since its introduction in April 2010.
As earnings have risen over time, more people have been pulled into this threshold.
The number of people losing some or all of their personal allowance is projected to rise by 88 per cent between 2021-22 and 2028-29, from 1.22mn to 2.29mn, according to HMRC estimates.
But a HM Treasury spokesperson said: “The overwhelming majority of parents earn less than £100,000, and too often it’s the most disadvantaged families who miss out on the support they need.
“That is why we have expanded free school meals to over half a million more children and are rolling out free breakfast clubs for every child in the country.”
Rathbones said this fiscal drag effect has been amplified by the freezing of main income tax thresholds since April 2021.
Meanwhile, speculation of a £2,000 cap on salary sacrifice for pensions could make matters worse.
Many employees currently use pension contributions to keep taxable income below £100,000 and retain childcare benefits.
Ebner said: “While making a personal pension contribution can achieve a similar effect, it often requires completing a tax return and potentially negotiating with HMRC to keep childcare benefits.
“For parents of young children, spending a weekend updating tax details online is rarely the best use of time.”
sonia.rach@ft.com
