New HMRC projections have triggered a stark warning for thousands of high-earning workers across the UK, who risk losing vital free childcare entitlements and facing punitive tax rates. The number of Britons earning six-figure salaries is set to surge past two million for the first time, dragging more families into a costly financial trap.
The Stealth Tax Squeeze on High Earners
According to figures obtained by wealth manager Rathbones, roughly six per cent of the UK's 34 million workforce will earn above £100,000 in the 2026-27 tax year. This marks a significant 5.7 per cent increase from the current year's estimate of 1.95 million. The primary driver behind this surge is Chancellor Rachel Reeves' decision to extend the freeze on income tax thresholds until 2031.
Critics have labelled this policy a "stealth tax," as it is designed to generate an estimated £11bn by the end of the current Parliament. Historically, tax thresholds were adjusted for inflation to prevent pay rises from pushing people into higher tax brackets. The freeze means that as wages nominally increase, more people are pulled into higher tax bands without a real-terms increase in disposable income.
The Harsh Consequences of the £100,000 Cliff Edge
Crossing the £100,000 earnings threshold carries severe and immediate financial penalties. The most impactful for many families is the complete withdrawal of free childcare hours once one member of a household earns more than £100,000, regardless of the other partner's income.
Furthermore, individuals earning between £100,000 and £125,140 face an effective marginal tax rate of 60%. This is because the personal allowance of £12,570 is gradually withdrawn at a rate of £1 for every £2 earned over £100,000. Data obtained by City AM via a Freedom of Information request shows that last year, 74,000 taxpayers were caught in this £100,000-£125,000 income bracket, a 12 per cent annual rise.
This phenomenon is creating a generation of so-called HENRYs (High Earners, Not Rich Yet). These are professionals, often with substantial living costs and scant savings, who see their strong salaries heavily eroded by tax and inflation, making it difficult to build long-term wealth.
Strategies to Mitigate the Tax Trap
Financial experts point to several strategies that those approaching the threshold can use to soften the blow. Olly Cheng, senior financial planning director at Rathbones, advises that one of the most effective methods is to increase pension contributions.
"Paying more into your pension, especially via salary sacrifice, not only saves on income tax but also National Insurance," Cheng stated. This can reduce your adjusted net income, potentially keeping it below the £100,000 cliff edge and preserving childcare benefits.
Other methods include making charitable donations using Gift Aid, which also lowers your taxable income. However, it is crucial to plan ahead, as a £2,000 cap on pension tax relief is set to take effect from April 2029, which will alter the landscape for tax planning.
The combination of frozen thresholds and high inflation is creating a perfect storm for a growing segment of the workforce, turning what was once a symbol of financial success into a complex financial planning challenge.
