How 2.3m workers will face the £100,000 tax trap within four years thanks to frozen thresholds

Frozen tax thresholds mean half a million more people will be dragged into the £100,000 tax trap by 2029, new figures show.

More people than ever are being caught in the 60 per cent tax trap, which affects those earning between £100,000 and £125,150.

For every extra £1 earned between £100,000 and £125,150, 50p of the tax-free personal allowance is removed, meaning the 40 per cent higher income tax rate is actually 60 per cent for some taxpayers.

Taxpayers who earn £100,000 also lose access to tax-free childcare and 30 hours of free childcare, which they have to pay for.

The number of taxpayers earning above the £100,000 threshold is expected to increase from 1.8million in 2024/25 to 2.29million by 2029/30, a Freedom of Information request by Rathbones shows – a jump of nearly half a million.

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Once the personal allowance is fully withdrawn, income above £125,140 is taxed at the additional rate of 45 per cent.

This ‘tax trap’ is compounded by the fact 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.

Stephanie Ebner, a financial planning lead at Rathbones, says: ‘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. 

‘These costs must be covered from post-tax income, so it’s no surprise many are concerned. Hard-working families would need a substantial pay rise just to offset the impact of this tax trap.’

It is further exacerbated by frozen income tax thresholds, which have not changed since then Chancellor Rishi Sunak froze them in 2021.

If thresholds had increased in line with inflation, the personal allowance would have increased from £12,570 to £16,243. 

If the 40p tax higher rate threshold had risen with inflation, it would be £64,959, up from the current £50,270.

Additional rate taxpayers have had the worst deal, as the threshold was cut from £150,000 to £125,140 from April 2023.

If the original £150,000 threshold had been uprated for inflation, people would only pay the additional tax rate on earnings over £193,831.

The higher marginal rate has encouraged people to pay more of their salary into their pensions and to salary sacrifice things like bikes and electric bikes, to bring their income down artificially.

Ebner says: ‘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.’

Others choose to reduce their working hours to stay below the threshold.

The Chancellor is reportedly eyeing a £2,000 cap on how much people can pay into their pensions using salary sacrifice without having to pay National Insurance, which is 8 per cent on basic rate earnings, and 2 per cent above higher rate thresholds.