An Income Tax trap will hit as many as 2.5m UK households with HMRC bills.
HMRC will hit millions of households with bills (Image: Getty)
A savage 62% Income Tax trap is set to hit as many a 2.5 million UK households thanks to frozen thresholds. Despite initially hinting at possible changes to the tax-free Personal Allowance, new Prime Minister Andy Burnham has backed away from committing to raising allowances for Income Tax, which would cost a reported £5 billion just to increase by £500.
At the same time, a £100,000 threshold at the other end of the earning scale is also pulling more and more earners into a ‘tax trap’ which leaves them on the hook for a staggering 62% effective Income Tax rate. The eyewatering rate derives from a quirk in the tax code. Between £100,000 and £125,140, the £12,570 tax-free personal allowance is gradually withdrawn, meaning income tax and National Insurance together eat up 62p of each additional pound earned.
Michael Healy, of IG, 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.”
Approximately 2 million households already fall into this tax trap, and the numbers are set to increase yet further. By 2031, as many as 2.5 million people will be caught by this cliff edge, according to analysis from IG published today, or 300,000 more than today as wage growth pushes more and more households above the line.
A Treasury spokesman said: “We are protecting payslips by keeping our promise not to raise income tax, National Insurance or VAT.
“The personal allowance is reduced for those with incomes over £100,000 to ensure support is focused where it’s most needed, including funding public services.”