Millions of taxpayers are expected to be dragged into the £100,000 income tax trap during this fiscal year, as finance experts watch for clues about whether the policy will be addressed in John Healey's first Budget as Chancellor in late October.
Sarah Coles, head of personal finance at AJ Bell, explains that for high earners with income over £100,000, "your personal allowance for income tax drops by £1 for every £2 you earn above the threshold, until it's all gone by the time you earn £125,140".
"Within this earnings band, you're effectively being taxed at 62%," she adds. Ms Coles says while the taxation "cliff-edge" this creates hasn't been officially frozen, it "hasn't moved since it was introduced in April 2010, so pay rises keep pushing more people over it".
The 62% breakdown and Scottish differences
The 62% is made up of the 40% income tax rate, 20% due to the personal allowance taper, and 2% in Class 1 NI contributions.
However, Scotland has different income tax bands from the rest of the UK.
The personal finance expert noted that while the £100k threshold "doesn't merit a mention in any Budget" reports suggest more than two million people are expected to cross it in the current tax year, an increase of over 1.5 million since it was first set.
Childcare support implications
Earning more than £100k also has implications for state-backed childcare support. Ms Coles explained that the tax-free childcare scheme was launched in 2017, also with a cut-off at £100,000.
"Where one parent earns over this amount, they miss out on the chance to get a bonus of 20% on childcare spending up to £2,000 per child. It hasn't come up at any Budget since, and is unlikely to surface at this one, but it still hasn't moved.
"Meanwhile, state support with childcare has been expanded significantly over the years, but was introduced for three and four-year-olds in September 2017, and the £100,000 threshold for losing this support hasn't changed since.
"Pay rises in the interim will have pushed more parents over the threshold, because average wages have risen almost 50% since then. If there's no mention of the threshold in the Budget, we will see even more people pushed into losing this valuable support."
Budget signals and planning ahead
Mr Healey, who was appointed as Chancellor by Prime Minister Andy Burnham in July, will deliver his budget on October 28.
Ms Coles suggests those looking for signals of major shifts in tax policy should be looking for what's not announced, as much as what is.
"Some changes are already in the pipeline, so if there are no announcements, we'll be hit by things like higher savings tax and inheritance tax on pensions," she explained. "No news is probably not good news on this front.
"In other cases, tax thresholds have been frozen, so unless they're specifically defrosted in the Budget, more people will drift over those thresholds and be hit with higher taxes. In other cases, the thresholds haven't been frozen; they just haven't moved for a very long time.
"In one notable case, they haven't moved for 45 years. If Healey doesn't mention them this time, we're set for another year rooted to the spot."
Ms Coles adds that the "only positive is that knowing we're highly likely to pay more of these taxes gives us an opportunity to plan ahead effectively, so we don't pay more than we have to".
