Approximately one million individuals earning between £100,000 and £150,000 annually may face tax increases in the upcoming budget announcement, even though they are already among the highest taxpayers.

Those earning six-figure salaries encounter a significant financial pressure where they begin to lose the £12,570 tax-free personal allowance. This impacts larger families the most.

According to a report for The Sunday Times by the investment platform AJ Bell, a parent with two children who receives a pay rise pushing them over the £100,000 mark will experience an effective marginal tax rate nearing 600% on income between £100,000 and £102,000, far exceeding the 45% top rate of income tax.

While Sir Keir Starmer has stated that Labour will not increase income tax, VAT, or national insurance rates under their manifesto, the definition of “working people” remains ambiguous. Last week, Stephen Kinnock, the minister for care, was asked if those earning over £100,000 qualify as “working people” but declined to clarify his stance, claiming he wouldn’t engage in budget speculation.

The lack of clarity has increased speculation among analysts regarding potential tax hikes for six-figure earners as Labour aims to gather the £40 billion supposedly needed to revitalize the UK’s public services.

Charlene Young from AJ Bell commented: “While the Labour manifesto pledged not to raise taxes on working individuals, there are growing discussions about how the Chancellor could navigate this commitment.”

“Even though a salary exceeding £100,000 appears substantial, the tax system has harsh penalties, meaning take-home pay is often much lower than one might expect. Many people discover that earning over £100,000 does not significantly improve their net income or may even leave them worse off compared to lower salaries.”

The number of individuals earning between £100,000 and £150,000 has risen from 474,000 in 2016-17 to approximately 1.01 million in the current tax year, reflecting an average increase of 75,000 per year, according to HM Revenue & Customs data. If this trend continues through 2028-29, the number facing financial challenges could reach about 1.3 million.

Most individuals in this income bracket reside in London, comprising about 355,000 of the total 1.2 million earning over £100,000 yearly. Additional clusters of high earners reside in the northwest (76,000), the east of England (141,000), and the southwest (78,000).

This demographic is predominantly male, with the disparity between male and female high earners widening annually. In the 2021-22 financial year, 909,000 men earned above this threshold compared to only 313,000 women.

Labour has also suggested they may not lift the income tax threshold freeze initiated by the Conservatives in 2021, which is set to conclude in 2028. This could result in additional individuals facing higher income tax rates as salaries rise.

Personal Allowance Reductions

Individuals begin losing £1 of their personal allowance for every £2 earned above £100,000. Complete loss of the personal allowance occurs at an income level of £125,140.

The total income calculated by HMRC to establish tax liability encompasses salary, earnings from shares, cash, and property, minus pension contributions, known as adjusted net income.

For those with salaries between £100,000 and £125,140, the income tax rate stands at 40% plus a 2% national insurance charge on earnings exceeding £50,270. Considering the loss of the personal allowance, the effective tax rate climbs to 62% on each additional £2 of adjusted net income past £100,000.

In Scotland, the additional income tax band results in those earning between £75,000 and £125,140 being taxed at an advanced rate of 45%, leading to a marginal tax rate of 67.5% for adjusted net incomes exceeding £100,000.

Withdrawal of Childcare Benefits

Parents can access three primary childcare support programs: tax-free childcare, government-funded childcare hours, and child benefit. However, higher earners frequently receive no assistance.

Once a parent’s adjusted net income exceeds £100,000, they lose eligibility for tax-free childcare, which enhances contributions of £8 by £2, applicable towards nursery fees, potentially worth up to £2,000 annually per child.

Furthermore, access to 15 free childcare hours weekly is denied for children from nine months old once a parent’s income crosses the £100,000 threshold. For children aged three to four, this support drops from 30 hours to 15 hours weekly.

By September 2025, the scheme is expected to expand to 30 hours for children aged nine months and older but will not include those making above £100,000.

Child benefit is gradually withdrawn at an adjusted net income of £60,000 annually, reaching full ineligibility at £80,000. Those with higher earnings who opt to retain child benefit must repay it through tax returns to avoid penalties.

Families with two children aged nine months and two years may lose nearly £13,000 of support this year, with losses escalating to about £20,000 by September 2025, as estimated by AJ Bell.

This potential £20,000 loss encompasses £2,279 in child benefit, £4,000 in tax-free childcare, and £13,726 in free childcare hours.

Parents repaying student loans will also experience greater financial strain as their salaries rise, paying between 6% and 9% of their income beyond a set threshold based on when the loan was acquired.

Impact of a £2,000 Pay Increase

If a parent making £99,000 adjusted net income receives a £2,000 raise to £101,000, they could end up losing nearly £10,000, resulting in an effective marginal tax rate of almost 600%, as analyzed by AJ Bell.

This calculation includes losing £400 of the personal allowance, £4,000 in tax-free childcare, £3,285 for losing the weekly childcare hours, and an additional £800 in income tax.

Thus, a £2,000 raise effectively costs the parent £11,940—translating to a 597% marginal tax rate.

Young emphasizes, “It’s surprising how much an individual’s salary must increase to regain previous post-tax income and childcare support once passing the £100,000 threshold.”

“Their salary would have to rise to £126,624 to restore their disposable income to the level it was at £99,000. This creates a scenario where individuals earning between £100,000 and £127,000 are effectively worse off.”

Strategies to Mitigate the Financial Cliff

To navigate this financial cliff, reducing adjusted net income is advisable, which may seem paradoxical but can yield better overall financial outcomes.

Start by calculating your adjusted net income by totaling all salary, savings, property, and share income.

Once you determine how much to reduce your net income to stay below the £100,000 threshold, consider making extra pension contributions.

If your adjusted net income is £101,000, contributing just £800 to a pension via salary sacrifice can bring you under the threshold. This approach results in immediate tax relief of 40% for higher-rate taxpayers, amounting to an additional £400.