The number of Britons caught in the £100,000 ‘tax trap’ is set to reach 2.5 million by 2031 due to the personal allowance taper loss, IG has warned.
The £100,000 threshold, where the tapering of the personal allowance creates an effective 60% marginal tax rate, has remained unchanged since it was introduced in 2010.
With income tax brackets frozen until at least April 2031 and the Government signalling the potential for further tax rises at next month’s Budget, the investing platform said it is highly unlikely that the £100,000 threshold will be raised before then.
The taper means that for those earning between £100,000 and £125,140, the personal allowance is withdrawn by £1 for every £2 earned above £100,000, creating a marginal tax rate of 60%. Had the threshold risen in line with inflation, it would be around £160,000 today and £174,000 by 2031.
IG said 2.06 million people now earn more than £100,000, up around 70% from 1.22 million in 2021/22 and more than three times the 588,000 recorded in 2010. By 2028/29, 2.29 million are expected to earn above £100,000, rising to 2.503 million by 2031.
IG estimates that the frozen threshold has generated the Government an additional £29 billion to date, compared with a scenario in which the threshold had risen with inflation. The additional annual tax revenue is currently estimated at £5.2 billion, rising to £7 billion a year by 2031.
Michael Healy, CEO of IG Consumer, 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.
“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.
“A promotion, bonus or pay rise should not feel like a financial cliff edge, and hard-working professionals are being disincentivised from taking that next step in their careers. Our hugely outdated tax system is holding back economic growth, and it should be a priority of the Government to end the freeze if they’re serious about boosting investment in the UK.”
Main image: carla-quario-RbOT5aMbTsE-unsplash
