Brits have been issued an urgent warning that getting a pay rise of £2,000 could actually make you worse off by a whopping £12,000.
Under the current system, high earning working parents face a steep drop-off point where a £2,000 salary increase to £102,000 per year can result in a £12,000 loss.
Due to peculiarities in the tax system, earners receiving between £100,000 to £102,000 can already face a staggering marginal tax rate of 600%.
A parent with two children who receives a pay rise pushing them over £100,000 a year post-pension contributions would lose the £12,570 tax-free Personal Allowance entirely and forfeit tax-free childcare.
A parent with two young children who earns £99,000 and then receives a £2,000 bonus or pay rise, bringing their income to £101,000, would face a staggering tax burden.
They would lose nearly £10,000 due to the tapering off of Personal Allowance, tax-free childcare benefits, and free childcare hours. This would result in an effective tax rate of almost 600%.
In reality, the £2,000 pay rise would ultimately cost the parent £11,940, equivalent to a 597% tax rate.
This figure accounts for the loss of £400 personal allowance, £4,000 in tax-free childcare, £6,729 in free childcare hours, and an extra £800 in income tax.
This tax year, 1.01 million people earned between £100,000 and £150,000 – an increase from 474,000 in the 2016-17 tax year – according to HM Revenue & Customs (HMRC) estimates.
By 2028-29, the number could have risen to about 1.3 million, if current trends persist.
About 355,000 of all those earning more than £100,000, about 355,000 live in London 76,000 in the northwest, 141,000 in the east, and 78,000 in the southwest.
These high earners are also mainly men, and the gender gap is only getting wider every year. Over 900,000 men earned over £100,000 in 2021-22, compared to 313,000 women.
This was a hotly debated topic before Rachel Reeves’ October Budget as there was intense speculation about potential tax changes, threshold adjustments and where funds would be allocated.
Despite Labour’s pledge not to increase VAT, National Insurance or Income Tax for “working people”, the party still finds it challenging to precisely define who falls into this category.
When questioned on whether individuals earning £100,000 are considered “working people”, Care Minister Stephen Kinnock avoided giving a direct answer.
This sparked rumours that Labour has no plans to address this tax trap for high earners.
