A million to pay 60% income tax within a few years
This means that someone earning around £75,000 today would be hit by the 60% tax trap before 2027, while anyone earning £81,000 would see their earnings exceed the threshold within four years.
Someone earning £90,000 a year would fall victim to the hidden tax rate within two years, assuming wage growth remains high.
Even from a more conservative perspective in which wage growth returns to its 10-year average of 3% after 12 months, someone earning £90,000 a year would still be hit by the tax trap within three years. It would take six years for someone with £81,000 in the same scenario and nine years for someone with £75,000, according to calculations by consultancy NFU Mutual.
According to NFU’s Sean McCann, the rapid rise in wages since the pandemic has already drawn many people online. Average earnings have increased by 16% since April 2020. For those whose earnings have followed this average, anyone who earned more than £86,200 then will earn more than £100,000 now.
“With the personal allowance frozen, as inflation continues to bite and wages rise to keep pace, thousands more will face the tax trap,” McCann said.
When the withdrawal of Personal Allowance was first mooted in 2007-08, fewer than 650,000 people had an income above £100,000. By 2019-20, that figure had risen to more than 980,000.
The Institute for Fiscal Studies, the respected think tank, has previously accused the government of raising taxes by “opaque” means, including via cuts and frozen thresholds, and of “abandoning” its policy of increases. thresholds based on inflation each year.
If the point at which personal allowance is withdrawn had risen with inflation since the policy was introduced in 2010, it would amount to nearly £125,000 today. But any change in where the cut takes effect seems unlikely after Chancellor Rishi Sunak announced a five-year freeze on all personal tax brackets last year – a stealth tax grab that is expected to generate tens of billions in additional revenue.
A Treasury spokesman said the move was necessary to “rebuild public finances after Covid”. He said the government was aware of the effect of lower tax rates, but said it was focused on providing “greater support for people on low and middle incomes”.
How to avoid the tax trap
High earners can reduce their taxable income and stay below the £100,000 threshold by contributing more to their pension. Workers can forgo wages and ask their employers to pour the money directly into their pension pots instead via a “wage sacrifice”.
Many employers offer such schemes, as they benefit from a considerable reduction in national insurance contributions. The worker also pays less in NI and also gets income tax relief on what they have invested.
For example, someone earning £100,000 and receiving a pay rise of £10,000 would pay £6,325 income tax and NI on their new earnings. By sacrificing this for a pension contribution, there is no NI to pay and they can claim 40% income tax relief. That would leave them with £10,000 in their kitty and they would only lose £3,675 to the taxman.