Income tax trap to capture 2.5 million Britons as households face £100,000 cliff-edge

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Recent research from investment firm IG is shining a light on how the £100,000 personal taper is impacting the finances of hard-working taxpayers

Some 2.5 million Britons are expected to be captured by an income tax trap, with analysts sounding the alarm over the impact fiscal drag is having on taxpayers.

According to new research from investment firm IG, millions will find themselves caught by the £100,000 personal allowance taper.

The mechanism, which strips away £1 of Personal Allowance for every £2 earned above the threshold up to £125,140, saddles affected earners with an effective marginal tax rate of 60 per cent.

Since its introduction in 2010 under the Conservative-Liberal Democrat coalition Government, the £100,000 trigger point has never once been adjusted upwards.

Income tax thresholds are expected to remain frozen until April 2031, and although the taper threshold is not technically part of that freeze, it lacks any automatic uprating mechanism.

Raising it would demand deliberate Government action, making any increase before the broader thresholds are unfrozen exceptionally unlikely.

Had the threshold kept pace with inflation, it would stand at roughly £160,000 today and reach approximately £174,000 by the end of the decade, IG's analysis suggests.

The number of people earning above £100,000 has ballooned dramatically since the taper was first introduced. In 2010, just 588,000 taxpayers sat above that level.

By 2021/22, the figure had climbed to 1.22 million. Today, some 2.06 million individuals earn in excess of the threshold, a rise of around 70 per cent in just four years and more than a threefold increase since the policy began.

IG calculates that the frozen threshold has already delivered an extra £29billion in tax revenue for the Treasury compared with a scenario where it had risen in line with inflation.

At present, the annual additional take stands at an estimated £5.2billion. That figure is projected to swell to £7 billion per year by 2031.

Over the full period since 2010, the cumulative windfall from keeping the threshold static could surpass £52 billion by the end of the decade, according to the platform's forecasts.

The absence of any built-in mechanism to adjust the taper threshold means it will continue to lag further behind earnings growth unless ministers choose to intervene directly.

Michael Healy, CEO of IG Consumer, said: "The £100,000 threshold is becoming increasingly detached from reality. It has been frozen since 2010, a time when Gordon Brown was our Prime Minister and Gary Neville still played for Manchester United."

He added: "Wages and inflation have risen sharply since that distant time, meaning millions more people have been dragged into a tax trap, or otherwise stunting their career development to avoid it."

Mr Healy argued that earning a promotion, bonus or pay rise ought not to feel like a financial cliff edge, warning that ambitious professionals are being put off from advancing their careers.