By 2026/2027, a pound-100k tax trap will affect two million taxpayers

More people than ever will pay an effective income tax rate of 60% when their earnings surpass £pound;100,000 due to frozen thresholds

We examine the reasons behind this as well as ways to stay out of the trap.

Tens of thousands more workers will be subject to an effective 60 percent tax rate in the 2026 - 2027 tax year, when the number of British earning six-figure salaries is expected to surpass two million for the first time.

According to estimates made by wealth manager Rathbones in a Freedom of Information request to HMRC, approximately 2.06 million taxpayers, or 6% of all UK workers, will make more than £100,000 in the upcoming tax year.

That represents an increase of approximately 112,000 people, or 5.7%, from HMRC's current estimate of 1.95 million for the 2025 - 2026 tax year.

According to the most recent estimates, there will be 842,000 more people earning £100,000 or more between 2021 - 2022 and 2026 - 2027, an increase of about 69% over the previous five years.

Due to a peculiarity of the tax system, more people than ever before will have to pay an effective 60 percent tax rate on their earnings as wages rise.

The tax-free personal allowance of 12,570 will gradually decrease for those who earn over 100,000, even though the maximum income tax rate in the UK (excluding Scotland) is 45%.

At a rate of one for every two dollars earned above this threshold, it begins to taper when you reach £100,000. People are subject to an effective 60% tax rate while their earnings fall within this range because it is completely lost once they reach 125,140 annually.

For instance, if your salary increases from £100,000 to £110,000, you would have to pay 40% tax on the £10,000 pay increase, or £4,000. But you would also forfeit five thousand dollars from your personal allowance.

That 5,000 would then be subject to the 40 percent rate, which would result in 2,000 in taxes. As a result, you are paying 6,000 in tax on the additional 10,000, or an effective tax rate of 60%. At 125,140, you completely forfeit your personal allowance and must pay the additional 45% tax rate on income over this amount.

Parents on 100,000 were subject to additional penalties.

That's not all, though. Even more penalties are imposed on parents with high incomes. You may not be eligible for childcare support if your income is less than £100,000 because you will no longer be eligible for free childcare hours and tax-free childcare. According to Rathbones, this is approximately £20,000 for parents who have two children under five.

According to Olly Cheng, senior financial planning director at Rathbones, earning £100,000 used to feel like financial freedom, but these days it frequently comes with a hidden tax burden. While inflation reduces the real value of earnings, frozen thresholds are driving more people into higher bands by inflating tax bills.

Because of the dual impact of rising taxes and the damaging effects of inflation, this has produced a generation of Henry's high earners who are not yet wealthy. The "

More people than ever will pay the 60 percent tax rate due to frozen tax thresholds.

After then-chancellor Rishi Sunak declared that tax bands would not be adjusted annually with inflation, as was previously the norm, income tax thresholds have been frozen since the 2022 - 2023 tax year.

Jeremy Hunt, the Tory chancellor, extended the freeze until the 2027 - 2028 fiscal year. Then, in the 2025 Autumn Budget, Labour Chancellor Rachel Reeves extended it once more until the 203031 tax year.

People are forced into higher tax brackets as their earnings rise because income tax bands are frozen rather than adjusted for inflation. This is referred to as fiscal drag. A "stealth tax" is a common term for it.

As long as tax thresholds stay at 2022 levels, more people will be forced into the effective 60 percent tax rate. This is because tax thresholds have been frozen until at least 2030/31. This is true even though eight years of inflationary pressures have reduced the real value of £100,000.

"Fiscal drag has become one of the most detrimental factors affecting the cost of living," Cheng at Rathbones continued. What was formerly thought of as a stealth tax is now well-known and heavily criticized. A "

Is it possible to escape the 60% tax trap?

Many high earners will be wondering if they can avoid the tax trap because the effective marginal tax rate is 60% on every pound earned between 100,000 and 125,140.

Although you won't necessarily have more money in your pocket right away, there are ways to avoid a 60 percent tax rate.

If you're still employed, one option is to reduce your annual pay by giving up a portion of your salary and using salary sacrifice to contribute it to a workplace pension.

"Paying more into your pension is one of the easiest ways to avoid or limit the impact of the 60 percent income tax trap," stated Cheng of Rathbones. Salary sacrifice is a more tax-efficient way to increase pension savings than personal contributions because it reduces income tax and National Insurance for both the employer and the employee. A "

A self-invested personal pension (SIPP) or an employer-sponsored pension plan can be used for this.

If you are a parent, you may still be eligible for the tax-free childcare program if you give up your pay in order to keep your adjusted net income below the £100,000 threshold.

Giving to charity is another way to avoid the 60 percent tax trap because Gift Aid contributions reduce your adjusted net income in a manner similar to pension payments.

"You can also use salary sacrifice to make charitable contributions or exchange a portion of your salary for non-cash benefits, like private medical insurance, which further reduces your adjusted net income," says Cheng, if your employer allows it. Savings from National Insurance also apply here. The "

Lastly, if you have qualifying shares, you can maximize share loss relief by offsetting your losses against your income until it is less than £100,000.

"You can choose to offset the loss against your income rather than capital gains if you subscribed for qualifying shares, such as those in an Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) company, and their value declines," Cheng stated.

This implies that the loss lowers your taxable income at your marginal rate, potentially saving higher earners a substantial amount of money on taxes. The "

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