UK Tax Threshold Deters High Earners From Pay Rises

What you need to know...

A significant number of UK employees are declining salary increases and bonuses in order to stay below the £100,000 annual income threshold. The current tax structure penalises those who exceed this limit by gradually removing the tax-free personal allowance and reducing eligibility for government childcare support.

This situation has sparked concern among professionals, employers, and financial experts, who argue the design of the system may deter ambition and affect the country's overall workforce productivity.

Growing concern over £100,000 tax threshold

The £100,000 threshold is a crucial benchmark in the UK personal tax system. Individuals whose income surpasses this amount lose their tax-free personal allowance at a rate of £1 for every £2 earned above £100,000.

This steep withdrawal rate, combined with increased tax liabilities, prompts some workers to refuse additional earnings to avoid adverse financial consequences. The Office for National Statistics (ONS) and HM Revenue & Customs (HMRC) have observed a rise in such decisions, particularly among professionals in the private and public sectors. Financial advisers report that clients are frequently seeking ways to manage their pay to remain under the threshold.

Impact on personal allowance and benefits

As of April 2024, the personal allowance the amount individuals can earn before paying income tax is set at £12,570. Once a person's income exceeds £100,000, this allowance reduces incrementally, resulting in an effective marginal tax rate of up to 60 percent between £100,000 and £125,140.

Additionally, falling above the £100,000 mark can affect eligibility for government childcare provisions. For instance, 30 hours of free childcare and tax-free childcare support become inaccessible, which can represent a significant financial setback for families with young children.

Financial implications for families

For many families, the loss of these benefits outweighs the value of a modest pay rise or bonus. In practical terms, the withdrawal of 30-hour childcare funding could equate to a loss of over £10,000 per child annually. Some families also lose access to up to £2,000 per child, per year, through the tax-free childcare scheme, which can double for households with two children.

Parents and carers affected by this rule often report that accepting a bonus or increase can result in a net loss once lost benefits are considered. This “tax trap” leads some to request their employers delay or divert payments, or forgo them entirely.

Economic behaviour and productivity

Experts suggest that the financial disincentives created by the current rules may distort natural economic behaviour. Affected workers may reduce their working hours, limit overtime, or decline promotions.

Michael Healy, a UK financial services executive, said, “When people are financially better off rejecting a pay rise, it's a sign the system is fundamentally misaligned with basic economic incentives.”

This phenomenon has broader implications for productivity and labour supply, as experienced professionals may reduce their contributions at a time when the economy requires growth and higher tax receipts.

Policy and expert reactions

The £100,000 threshold and associated mechanisms have been widely criticised by tax advisers and economists. Stephanie Ebner, financial planning lead at Rathbones, described the rules as “one of the most baffling quirks in our tax system”.

She and others argue that such “cliff edges” disincentivise productivity and career progression. Calls for reform have come from several sectors, with proposals to adjust the threshold or taper the loss of allowances less aggressively to reduce the scale of the tax penalty.

However, no official government plans for changes have been announced as of June 2024.