Britain's 60% tax trap: Lambert outlines fixes to unlock growth

Britain's income tax system has a built-in trap for high earners that dampens growth: a 60% marginal rate on earnings between £100,000 and £125,140, caused by the tapering of the personal allowance. HMRC data obtained via a Freedom of Information request from NFU Mutual show almost 1.5 million people paid 60% tax on some or all of their income in the 2024-25 tax year. While the official top rate is 45%, the interaction of the personal allowance withdrawal and taking the next pound at higher rate creates a 60% bite for the next tier.

The taper is triggered as earnings rise above £100,000: for every £2 of income above that threshold, £1 of personal allowance is removed, lifting the marginal rate on the next pound toward 60%. The effect is concentrated in the £100,000 to £125,140 band, and once income reaches £125,140 the personal allowance is fully withdrawn, after which the 45% additional-rate applies. In practical terms the system produces a blend of marginal rates across 20%, 40%, 60% and 45% bands, complicating planning for high earners and their employers.

The policy issue has grown as the £100,000 threshold has been frozen since 2010. If it had risen with inflation, the cutoff would be about £181,000 today, a shift that would spare thousands from the trap. NFU Mutual's figures show 591,000 people were losing some personal allowance and 885,000 lost it in full in the 2024-25 year, for a total of about 1.48 million affected at some point. The effect goes beyond cash tax receipts; it has shaped behavior, with some workers reducing hours, avoiding salary rises, or cutting back on benefits such as childcare support that phase out above the threshold.

This is Money columnist Simon Lambert outlines four options to fix or soften the trap and presents his verdict on each. First, abolish the personal allowance taper completely so everyone keeps their £12,570; Lambert argues this would remove the trap and could be paired with starting the 45p rate at £100,000 to keep the system fairer. Verdict: he sees this as the best option. Second, widen the taper band to £100,000–£150,000 (or more), which would reduce the marginal rate but still leave some “bad tax” elements; he suggests scrapping the taper altogether as a better approach. Verdict: a softened but still imperfect fix. Third, introduce a high-earner surcharge: a distinct band or surcharge for top earners. Verdict: more honest but potentially politically risky. Fourth, simplify the tax system by using the trap as a catalyst for broader reform—smoothing band transitions and removing the kind of cliffs that trip up earners. Verdict: a root-and-branch reform that would end the 60% trap and reframe the system.

Britain’s reliance on the top 10% of earners is evident in tax receipts: people earning £71,600 or more account for about 59% of income tax receipts. The debate over reform has political implications as well as economic ones, with no consensus on how far to go or how to balance fairness against growth. Reeves-era policy choices will be watched closely as the government considers tax reform to bolster growth without alienating high earners and business investment.

As Lambert notes, there would be backlash to any change, but the justification for removing a drag on growth and fairness is strong. He also invited readers to submit ideas via This is Money, saying the best suggestions could shape a future article. A listener recently suggested practical ways the government could fix or soften the trap, and the author pledged to consider those ideas for a future piece.