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The writer is founder of Tax Policy Associates
For almost 20 years, governments have played tricks with tax rates: keeping the headline rates down while using tapers, clawbacks and special rules to impose much higher marginal rates by stealth.
That, combined with years of frozen thresholds, has dragged the UK into some of the highest marginal tax rates in the developed world — blunting incentives and holding back growth.
A parent earning an ordinary salary can face marginal rates well above 50 per cent. Then, at £100,000, the personal allowance starts to be withdrawn, creating a 62 per cent marginal rate. Above £125,140, the allowance is gone — and the rate falls back to 47 per cent.
You can argue for progressive taxation and high rates. But a system where rates rise and then fall as income increases is indefensible. And this is not even the worst problem.
There are points in the system where earning more leaves you worse off. The most visible is childcare. Support worth many thousands of pounds disappears once individual income hits £100,000. The result is a marginal tax rate of thousands of per cent — meaning that you can be better off earning £99,999 than earning £140,000. It’s — literally — confiscatory.
While that £100,000 childcare trap grabs the headlines, an arguably more brutal cliff edge quietly punishes those at the other end of the income scale. The carer’s allowance is withdrawn in full once earnings pass a limit of just over £10,000. A carer earning £14,000 is worse off than a carer earning £10,000.
We’ve created a tax system where it’s rational for both a carer on £9,000 and a parent on £99,000 to turn away work. Rational for them, but an absurd result for the UK. When doctors can increase their take-home pay by cutting their hours working in the NHS, something has gone badly wrong.
Salary sacrifice and pension contributions help some individuals navigate around these cliff edges, but many will not opt for money decades away.
None of this is theoretical. In 2022-23, there were 32,000 taxpayers holding back their income below £100,000, and 230,000 holding it back below £50,000 (the child benefit clawback point at the time). And, each year, fiscal drag is making the situation worse.
Many people now recognise the problem and the government says it’s looking again at childcare; but what’s been missing is a serious, costed, solution. This week, the Centre for British Progress think-tank has provided one.
The most important proposal concerns childcare. Here the report does something really innovative and smart: it replaces the £100,000 cliff edge with a new 3 per cent tax on income over £100,000 for each child receiving support. The effect is immediate. The cliff edge disappears; the confiscatory jump is replaced by a smooth phaseout. Those just above £100,000 are barely affected, while higher earners face a clear, proportionate trade-off.
The Centre for British Progress figures show that this reform would also raise money: enough, in fact, to fix the other three distortions. The carer’s allowance cliff edge could be replaced with a sensible taper, while the child benefit and personal allowance tapers could be smoothed and extended. That would bring the highest marginal rate of tax down to 54 per cent — at no cost to the Exchequer.
None of this requires a grand ideological argument about the overall size of the state or the right level of redistribution. People can disagree, perfectly reasonably, about how much tax high earners should pay. But no coherent system would have teachers, doctors and middle managers facing higher marginal rates than those earning £1mn.
Chancellor Rachel Reeves says she wants growth. Here is a test. Britain’s tax cliff edges are economically damaging, administratively irrational and politically indefensible. Until now, ministers could claim there was no alternative. That excuse has gone: ministers should get to work.
