Middle-income professionals earning over £75,000 are facing an effective tax rate that could see them paying more than 50% on every additional pound earned, according to startling new analysis of Britain's frozen tax thresholds.
The phenomenon of 'fiscal drag' has created a perfect storm for what many would consider comfortable earners, with frozen income tax thresholds combined with the gradual withdrawal of the personal allowance creating a hidden tax trap.
The Stealth Tax Squeeze
While the government hasn't officially raised income tax rates, the decision to freeze tax bands until 2028 has created a dramatic increase in the tax burden for those earning between £75,000 and £125,000. As salaries increase with inflation or career progression, more people are being pulled into higher tax brackets without realising the financial impact.
How the Numbers Stack Up
For every £1 earned above £100,000, workers lose 50p of their personal allowance. This creates a devastating double-whammy when combined with the 40% higher rate tax band. The result? An effective marginal tax rate of 60% on income between £100,000 and £125,000.
Consider this: someone earning £125,000 effectively pays the same amount of tax as if the basic rate of income tax were 42% across their entire income. This represents a significant departure from the traditional understanding of progressive taxation.
Who's Really Affected?
This isn't just about city bankers and corporate executives. The £75,000+ bracket now includes:
- Senior teachers and headteachers
- Experienced NHS consultants and GPs
- Middle management professionals
- Technical specialists and engineers
- Successful small business owners
Many of these individuals wouldn't consider themselves wealthy, particularly those supporting families in high-cost areas or dealing with substantial mortgage payments.
The Political Dilemma
The frozen thresholds have become a contentious political issue, with critics labelling them as 'stealth taxes' that disproportionately affect middle-income professionals. While the government maintains that higher earners should contribute more, many argue the current system creates unfair disincentives for career progression and professional development.
As one tax expert noted, "We're creating a system where working harder or getting promoted can actually leave you worse off after accounting for increased costs and lost benefits."
Planning Ahead
Financial advisors suggest several strategies for those affected:
- Pension contributions can reduce your adjusted net income and potentially restore some personal allowance
- Salary sacrifice arrangements for benefits like electric cars or additional pension contributions
- Charitable giving through Gift Aid can provide tax relief
- Exploring tax-efficient investments where appropriate
However, experts caution that professional financial advice is essential, as individual circumstances vary significantly.
The reality is that until 2028, more professionals will find themselves caught in this tax trap as wages gradually increase while thresholds remain static. Understanding the impact and planning accordingly has become essential financial literacy for Britain's middle-income earners.
