Analysts are warning that the UK's tax system harbours a "punishing trap" for those earning over £100,000 which could see Britons pay an effective rate of 62 per cent.
For every £2 earned above this threshold, £1 of the £12,570 personal tax-free threshold is gradually lost with this allowance vanishing completely once income reaches £125,140.
The result is a effective tax rate of 60 per cent on earnings within this band. When National Insurance contributions are factored in, this rises to 62 per cent.
This mechanism combines the standard 40 per cent income tax rate with the progressive loss of tax-free earnings and is ensnaring more Britons each year, critics claim.
According to a freedom of information request obtained by the Financial Times in December, an estimated 634,000 taxpayers fell into the 60 per cent tax trap in the 2023-24 financial year.
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Britons are getting slapped with a "punishing" 62 per cent tax trap
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This represents a massive 45 per cent jump in just two years with the freeze on income tax thresholds pushing more people into higher tax brackets as wages rise.
A household with two people earning £50,000 each will take home £10,000 more annually than a single-income household of £100,000.
In recent months, the UK's tax burden has reached a 70-year high with looming HM Revenue and Customs (HMRC) raids to come into effect from April.
Pension contributions offer a powerful solution by reducing your adjusted net income, according to experts from interactive investor.
For example, if you earn £110,000 and contribute £8,000 to your pension (boosted to £10,000 with basic-rate tax relief), your net income drops to £100,000.
Interactive investor cites this strategy as being useful to preserving someone's personal allowance while saving 40 per cent income tax.
It also boosts your retirement savings with tax-free investment growth. Most people can contribute up to £60,000 annually to pensions with tax relief at their marginal rate.
Remember to include these contributions on your tax return. The only caveat is that you can't access these funds until at least age 55 (rising to 57 in 2028).
Craig Rickman, a personal finance editor at interactive investor, broke down the impact of fiscal drag on peoples' taxable income.
He explained: "Successive governments’ decisions to freeze income tax thresholds are nudging more people into the upper tax thresholds.
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The Chancellor is being called to review tax rate thresholds
PA"As such, protecting your wealth and income from HMRC’s mitts has never needed more focus.
"The UK’s tax burden was already at a 70-year high before Chancellor Rachel Reeves delivered £40 billion in hikes at the Autumn Budget.
"For anyone earning £100,000 or more, there are some key things to consider. Let’s explore these and offer tips on what you can do to keep the taxman at arm’s length with April 5 approaching."
The Chancellor is set to unveil her fiscal agenda for the economy during the next Spring Budget on March 26, 2025.
