Victims of 60pc ‘tax trap’ could double within the next year

THE number of high earners caught in a hidden 60 per cent “tax trap” is set to double by the end of the next tax year, projections show.

People earning £100,000 a year lose their tax-free personal allowance and face a marginal rate of 60 per cent on earnings between £100,000 and £123,000. The tax will affect at least 800,000 people this year, data from the Institute for Fiscal Studies (IFS) shows, up from 588,000 in 2010-11.

If the trend continues it is expected that a million people will be dragged into the tax band by the end of the next tax year. This is due to wage inflation pushing incomes above the tax threshold and the tax band widening in line with the expanding tax-free personal earnings allowance.

Under the rules, announced in 2010, an individual’s personal allowance reduces by £1 for every £2 their adjusted net income rises above £100,000.

As the Government has raised the personal allowance from £6,475 in 2010 to £11,500 today, the upper limit of the band in which 60 per cent tax is owed has risen from £112,950 to £123,000. People earning above £123,000 lose 100 per cent of their personal allowance.

While the Conservative party has no specific plans to change the policy, Labour’s proposals would leave it in place, and through its plan to move the 45 per cent tax threshold down to £80,000, would increase the marginal income tax rate in the £100,000 to £123,000 band from 60 per cent to 67.5 per cent.

Last night, tax experts described the 60pc tax as “absurd” and “conveniently confusing” and warned that politicians had missed a trick by failing to address the problem in their manifestos.

Tina Riches, partner at accountancy firm Smith & Williamson, said: “This tax band is rarely flagged up by the Government and political parties, yet it is one of the highest rates of tax we have in this country. People don’t understand how it works or its effects because it is conveniently described as ‘losing your personal allowance’, which is very confusing.”

Commenting on Labour’s election manifesto, Stuart Adam, a tax expert at the IFS, wrote: “The planned overhaul of the taxation of those on higher incomes would have been an obvious chance to remove the absurd and arbitrary marginal income tax band between £100,000 and £123,000.”