Analysts are warning that the UK tax system imposes a significant financial burden on those earning over £100,000, creating what some describe as a "punishing trap." Due to a mechanism that gradually reduces the personal tax-free allowance, individuals within this income bracket can face an effective tax rate of up to 62% when National Insurance contributions are factored in.

Under current tax rules, for every £2 earned above £100,000, £1 of the £12,570 personal allowance is lost. This results in a 60% tax rate on earnings between £100,000 and £125,140, before National Insurance contributions push the effective rate even higher. Critics argue that this structure disproportionately impacts middle-to-high earners and is drawing more people into higher tax brackets each year.

Data obtained through a Freedom of Information request by the Financial Times in December revealed that approximately 634,000 taxpayers were caught in this 60% tax bracket during the 2023-24 financial year. This marks a staggering 45% increase over just two years, largely due to the government’s decision to freeze income tax thresholds despite rising wages.

The impact of this tax policy is particularly evident when comparing household incomes. A dual-income household where two individuals earn £50,000 each will retain around £10,000 more annually than a single-income household earning £100,000. This discrepancy highlights how the tax system can create unintended financial disadvantages for certain taxpayers.

In response to this growing tax burden, experts recommend pension contributions as a strategic way to lower adjusted net income and mitigate tax liabilities. For instance, an individual earning £110,000 who contributes £8,000 to a pension—boosted to £10,000 with basic-rate tax relief—can effectively reduce their taxable income to £100,000. This not only helps preserve the personal allowance but also allows the taxpayer to benefit from tax-free investment growth within their pension fund. Currently, individuals can contribute up to £60,000 annually to their pensions with tax relief at their marginal rate. However, it's important to note that pension funds typically cannot be accessed until age 55, with this threshold set to rise to 57 in 2028.

Craig Rickman, a personal finance editor at interactive investor, has emphasized how fiscal drag—the process of more people falling into higher tax brackets due to frozen thresholds—has led to a growing tax burden. He stated: "Successive governments’ decisions to freeze income tax thresholds are nudging more people into the upper tax brackets. As such, protecting your wealth and income from HMRC’s mitts has never needed more focus."

The UK tax burden has already reached a 70-year high, and further changes may be on the horizon. Chancellor Rachel Reeves introduced £40 billion in tax hikes during the Autumn Budget, and her upcoming fiscal agenda is expected to be unveiled during the Spring Budget on March 26, 2025. As this date approaches, financial experts are urging high earners to consider tax planning strategies to optimize their income and savings.