Britain needs growth industries. Unfortunately, one of our fast-growing niche industries involves highly valuable and productive workers trying to earn less money.
This innovative but unwanted bit of the economy is triggered by the 60 per cent tax trap, which kicks in if someone earns more than £100,000.
A relentless refusal to remove this widely lambasted income tax contrivance or even raise the £100,000 threshold since it was introduced in 2010, has led to huge rise in the number of people caught by it.
HMRC estimates for a freedom of information request by NFU Mutual revealed almost 1.5million people paid 60 per cent tax through losing some or all their personal allowance in the last tax year.
So, what’s going on here? Officially, our top rate of income tax is 45 per cent but really, it’s 60 per cent.
That’s the rate on the next pound someone earns between £100,000 and £125,140, due to the gradual removal of their personal allowance.
High earners are walked into a tax trap that sees them lose 60% of the next pound earned
This is because taking £1 of tax-free allowance away for every £2 of extra income bumps up the 40 per cent higher rate in that bracket by half, creating a 60 per cent income tax rate instead.
Once people get to £125,140, two things happen: they shift to the 45p additional tax rate and their entire £12,570 personal allowance is gone.
After this, the magnifying effect of taking it away on money earnt above the threshold ends but they will still lose 60 per cent of the £25,140 in the bracket – only keeping £10,056 of it.
This means that income tax bands go 20 per cent, 40 per cent, 60 per cent, 45 per cent.
This is not one of those weird quirks where tax and benefits clash, but an element baked into the income tax system.
When it was introduced in 2010 by then Chancellor Alistair Darling this was a niche issue, but with that £100,000 threshold remaining frozen through seven Conservative Chancellors and now into one Labour one, it’s hitting a lot more people.
If the £100,000 threshold had risen with RPI inflation it would now be £181,000, This is Money’s historic inflation calculator shows. To put that another way, earning £100,000 today is the equivalent of £55,000 in 2010.
HMRC figures for the NFU Mutual FOI request showed that in the 2024 to 2025 tax year, 591,000 people were losing some of their personal allowance and 885,000 had lost it all.
That adds up to 1.48million people at some point losing £60 of £100 earned to income tax.
Rachel Reeves had an opportunity to sweep away the Tories’ tax system mess, she chose not to do that
This usually triggers two things that are deeply unhelpful to an economy that has become increasingly reliant on their taxes: firstly, a feeling of being treated very unfairly, and, secondly, attempts to minimise the effect.
At the financial end, people pay more into pensions, salary sacrifice bikes and electric cars and do whatever else they can to artificially bring their income down.
More damagingly, stories also abound of people deciding to reduce working hours to stay below the £100,000 threshold and turning down extra work.
The problem is exacerbated by childcare support also being pulled if one partner earns more than £100,000, which creates a potential astronomical marginal tax rate.
Regular readers will know the 60 per cent tax trap is a major bugbear of mine, as it really rattles my ‘tax should be fair and simple’ cage.
From the day it was unveiled, I have never been able to understand how you can justify a higher marginal tax rate for those on less money than the biggest earners.
Someone on £100,000 who gets a £5,000 pay rise gets to keep just £2,000 of it, but someone on £150,000 gets to keep £2,750.
But we have now got to the point where through a monumental piece of fiscal drag, the number of people affected by it has mushroomed and it long ago tipped into being anti-growth.
Ultimately, the 60 per cent tax trap problem has never been solved because the Tories were terrified of being seen to favour the rich and Labour does not want to look like it is giving high earners a tax break.
But we are past the point where it is damaging the economy and with Britain reliant on the top 10 per cent of earners for 59 per cent of income tax receipts (those earning £71,600 or more) and desperate for growth, it’s time a Chancellor sorted this out.
Of course, there would be a backlash in some quarters but removing a damaging tax trap is easy to justify and support could be greater than expected.
From reading our comments section, I have seen in recent years that there’s been a major shift in the view of those who are below this high earning bracket but view 60 per cent tax as wrong.
But how do we solve it? One of our This is Money podcast listeners got in touch after my most recent attack on the 60 per cent tax trap to say that we need to come up with some ideas to help sharpen Rachel Reeves’ mind.
He said: ‘While you’ve rightly criticised this absurd marginal rate, the conversation often stops at the complaint. I believe your platform is perfectly positioned to help shape that dialogue.’
He offered ‘practical ways the government could fix or at least soften the 60 per trap’. These are the suggestions and my short verdict on each.
Tell us what you would do about the 60 per cent tax trap and whole system in reader comments below. We will use the best ideas for a future article.
1. Abolish the personal allowance taper
Idea: Remove the taper completely so everyone—regardless of income—keeps their £12,570 tax-free allowance. This would eliminate the trap entirely, though it comes with a fiscal cost.
My verdict: This is the best option. Even doing it in conjunction with lowering the 45p tax band to start at £100,000 would be fairer than the current mess.
2. Widen the taper band
Idea: Stretch it to £100,000 to £150,000 (or more). This lowers the marginal rate from 60 per cent to a more reasonable level like 45 per cent.
My verdict: You retain a ‘bad tax’ element, but this softens the blow. You still end up with some earners paying a higher rate than those further up the scale. Better to scrap it.
3. Introduce a high earner surcharge
Idea: Rather than sneakily removing allowances, just create a clear, additional tax band or surcharge for higher earners. It’s simpler, more honest, and easier to justify politically.
My verdict: It’s more honest but would a surcharge backfire? Higher earners already carry a lot of our tax burden.
4. Simplify the whole tax system
Idea: Use the 60 per cent tax trap issue as a launchpad for broader reform -smoothing transitions between tax bands and removing the kind of hidden cliffs that trip up even the most financially literate.
My verdict: This would involve getting rid of the 60 per cent tax trap and using that as a cornerstone for a root and branch sort out of Britain’s byzantine tax code. After nearly 14 years of the Tories making the tax system more complicate, this is what I hoped ‘new broom’ Rachel Reeves would do. She knows it needs to happen, come on Rachel, fix things for the better.
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