John Healey is facing calls to tackle a £100,000 tax cliff edge in the Autumn Budget, as advisers warn that Britain’s tax system can sharply reduce the financial reward for workers who increase their earnings.
Blick Rothenberg, the audit, tax and business advisory firm, said the interaction between income tax and the withdrawal of the personal allowance creates an effective marginal tax rate of 60 per cent for people earning between £100,000 and £125,140.
For some households, the impact can be greater because crossing the £100,000 threshold can also affect eligibility for childcare support.
Elisa Sofocli, a partner at Blick Rothenberg, said the system could undermine one of the basic financial incentives behind career progression.
“Most people would expect a pay rise to provide a clear financial reward for taking on greater responsibility, progressing in their career or increasing their earnings,” she said.
“Yet for many individuals earning between £100,000 and £125,140, the UK tax system can significantly dilute that reward.”
The personal allowance, which is currently tax-free, is gradually withdrawn once adjusted net income exceeds £100,000. This creates a band in which additional earnings can be taxed at an effective rate of 60 per cent. Sofocli said the figure could reach 62 per cent once additional National Insurance contributions are taken into account.
“The 60% tax rate – or indeed 62% in most cases because of the extra National Insurance Contributions (NICs) – is clearly unfair,” she said.
The difficulty for ministers is that eliminating the distortion would create its own distributional consequences.
Restoring the personal allowance while reducing the additional-rate threshold to £100,000 would leave taxpayers earning above £125,140 better off. Sofocli argued that simply lowering the threshold would therefore fail to recover the cost of removing the existing tax trap.
“To fully claw back that benefit, the additional rate would need to begin at somewhere below £50,000,” she said.
Such a move would bring a substantially larger number of taxpayers into the highest income-tax band, potentially shifting the burden well beyond the group currently affected by the £100,000 taper.
The issue highlights a broader challenge for the Chancellor as the government considers how to balance incentives to earn more against the need to raise revenue.
Sofocli said ministers could not simultaneously encourage workers to accept greater responsibility and progress professionally while maintaining a system that could leave some questioning the financial value of doing so.
“This is the reality facing the Chancellor,” she said. “There is no obvious cost-neutral solution.”
“The political challenge is not identifying the problem. It is finding a way to fix it without either giving a sizeable tax cut to higher earners or increasing the tax burden on a much wider group of taxpayers.”
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