A 62% Income Tax trap could hit as many as 2.5 million UK households, according to analysis from IG published today. The effective rate stems from a quirk in the tax code that gradually withdraws the £12,570 tax-free personal allowance for earners between £100,000 and £125,140, meaning Income Tax and National Insurance together consume 62p of each additional pound earned.
Frozen thresholds and political stance
Despite initially hinting at possible changes to the tax-free Personal Allowance, Prime Minister Andy Burnham has backed away from committing to raising allowances, a move that would cost a reported £5 billion just to increase by £500. The £100,000 threshold, frozen since 2010, is pulling more earners into the trap.
Michael Healy, of IG, said: “The £100,000 threshold is becoming increasingly detached from reality. It has been frozen since 2010, a time when Gordon Brown was our prime minister and Gary Neville still played for Manchester United.”
Rising numbers and future projections
Approximately 2 million households already fall into this tax trap. By 2031, as many as 2.5 million people could be caught by this cliff edge, or 300,000 more than today, as wage growth pushes more households above the line. Healy added: “Wages and inflation have risen sharply since that distant time, meaning millions more people have been dragged into a tax trap, or otherwise stunting their career development to avoid it.”
Treasury response
A Treasury spokesman said: “We are protecting payslips by keeping our promise not to raise income tax, National Insurance or VAT.” The spokesman added: “The personal allowance is reduced for those with incomes over £100,000 to ensure support is focused where it's most needed, including funding public services.”
