Over 500k taxpayers caught by 60% tax trap
Sara White, Editor, Accountancy Daily
More than half a million UK taxpayers caught in 60% tax trap, up nearly a quarter in last year as frozen thresholds bite
The number of taxpayers paying 60% tax on a proportion of their income was 537,000 in 2022-23, up 23% from 436,000 in 12 months.
A major flaw in the current income tax system means that people earning between £100,000 and £125,140 pay 60% income tax on that slice of their earnings. This is because the tax-free personal allowance of £12,570 is gradually removed once earnings exceed £100,000 annually.
The new government should take urgent action to fix this inequality in the income tax system, as it risks discouraging people from pushing to increase their earnings past £100,000 a year, warned Bowmore Financial Planning.
The number of people caught in the high earner tax trap has jumped in the past year as inflation continues to drive up wages.
Mark Incledon, chief executive at Bowmore, said: ‘With so many more taxpayers reaching six figure earnings, the tax trap puts higher earners at a big disadvantage.
‘Reaching a six-figure salary has long been a major goal for a lot of people. We all understand that this comes with the obligation to pay more tax. Unfortunately, if HMRC takes 60p in every pound you earn above £100,000, the lure of getting there is a lot more limited.
‘With the increased cost of living eroding the real value of salary increases, the incoming government must address the tax trap for higher earners. It only disincentivises people from working harder, being more productive and ultimately generating economic growth.’
Meantime, it is expected that 300,000 people will be dragged into higher rate tax in 2024 as years of frozen thresholds erode the tax free sum, bringing 40% tax earners to a record 4.4 million.
At the same time, over one million people are now paying additional rate tax at 45%, with a further 180,000 taxpayers exceeding the £125,140 limit by the end of the year. Thresholds are frozen until April 2028 by the last government, and Labour has shown no intention of raising these during the current parliament.
Laura Suter, director of personal finance at AJ Bell said: ‘These latest figures lay bare the real impact of freezing income tax bands during a period of high inflation and wage growth.
‘The data estimates that since thresholds were frozen in the 2021/22 tax year 4.4 million more people will be dragged into paying income tax in the current tax year as people’s earnings have exceeded the frozen personal allowance of £12,570.’
