UK fiscal drag widens £100,000 tax trap as threshold freeze persists

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UK £100k tax trap widens

Highlights

Tens of thousands more UK workers to enter the £100,000 tax trap in 2025 as frozen thresholds and inflation-linked pay rises increase exposure.
Effective marginal tax rates can reach 71 per cent for earners just above £100,000 due to combined income tax, NICs, and student loan repayments, plus lost childcare benefits.
By 2031, nearly 11 million people will pay higher or additional income tax rates as the threshold freeze persists, extending a record decade of weak disposable income growth.

Threshold freeze deepens pressure on working households

As reported by Financial Times, calculations compared with the Spring Statement in March show that tens of thousands more people are likely to be caught by the so-called £100,000 tax trap next year if pay rises in line with inflation expectations.

For some households, the issue is already shaping financial decisions. Lucy Cooper, 32, who works in financial services, says the Budget offers no material help for working families in her position because income tax and student loan thresholds remain frozen.

She expects her pay to rise above £100,000 in April, pushing her into what she describes as an effective 71 per cent marginal tax rate once income tax, national insurance contributions and student loan repayments are included. Crossing that level would also remove her access to free childcare hours, and she estimates nursery fees for her son for three days a week would exceed £1,000 a month.

Cooper says she plans to use salary sacrifice to keep her adjusted net pay below the limit. She adds that the tax system is influencing decisions on housing, working hours and whether her family will have a second child.

Budget impact raises wider concerns over disposable income

The Budget leaves workers with little relief from a pattern that has continued through successive fiscal statements since 2022. Although Chancellor John Healey promises "breathing space for today, hope for tomorrow" in his first Budget this week, tax advisers and planners say the continued freeze on thresholds means the burden on households keeps rising.

James Quarmby, a tax partner at Stephenson Harwood, says households are still facing ongoing pain even if the Budget avoids more severe tax measures. Malvee Vaja, a financial planner at Rathbones, says there is growing demand for support through changes to tax bands, but the Budget contains no action on that front.

The Institute for Fiscal Studies warns this week that households are enduring the worst decade on record for disposable income growth. While retirees whose only income is the state pension receive some protection through a new pension tax allowance, workers see no equivalent respite, and the revenue raised by fiscal drag is expected to far exceed the Budget's other revenue-raising measures.

By 2031, nearly 11 million people are expected to pay higher and additional rates of income tax, charged at 40 per cent on earnings above £50,270 and 45 per cent above £125,140. Last year, Healey's predecessor Rachel Reeves extends the threshold freeze to 2031, reinforcing a trend that continues to widen the tax base without changing headline rates.

Our earlier article on John Healey’s deficit-reduction stance ahead of the October Budget explained that the chancellor intends to stick with an IMF-backed plan to cut the UK deficit while trying to support growth. It also highlighted modest economic resilience after UK GDP rose 0.1% in August and noted rising political pressure over how far fiscal discipline should go versus measures to ease living-cost strains.

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