How the top tax rate became a middle-class problem

Times

09-08-2025

When Gordon Brown's Labour government introduced a new top rate of income tax, fewer than one in every hundred taxpayers had to worry about it.
However, the number of workers liable for the additional rate is predicted to surge to 1.7 million by 2030 — more than a seven-fold rise over two decades.
The corrosive combination of inflation and frozen tax thresholds means that hundreds of thousands more earners will be dragged into paying the 45p in the pound rate, and will have to grapple with a host of other tax hits that come with it.
The additional rate of income tax is 45 per cent on income above £125,140. When introduced in 2010, it was set at 50 per cent on income above £150,000 and about 236,000 people paid it.
But HM Revenue & Customs estimates that 1.2 million taxpayers will pay the additional rate this year, and its internal forecasts, seen by Money, show that the taxman expects 1.5 million people to be paying the 45p tax rate by 2028.
By 2030 that figure will hit 1.7 million, according to analysis by the wealth manager Quilter, meaning an extra half a million people will be dragged above the threshold in the next five years.
'The number of people paying the additional rate of income tax has risen exponentially since thresholds were frozen,' said Shaun Moore from Quilter.
The top rate of income tax was reduced to 45 per cent in 2013 under the coalition government. Kwasi Kwarteng tried to abolish it outright in his doomed mini-budget of 2022, but in 2023, the threshold was reduced to £125,140 by Jeremy Hunt to be in line with the point at which you lose all your tax-free allowance. This, combined with the freeze on income tax thresholds since 2021 and rising salaries, has dragged many more into the top tax band.
By 2030 the proportion of total taxpayers paying the top rate will have jumped from 0.7 per cent to more than 4 per cent.
Had the original £150,000 threshold risen with inflation since 2010 it would be £232,000 today. If the present £125,140 threshold had kept pace with inflation since 2023 it would be £132,000 today.
'When the additional rate was introduced, it was meant for the very highest earners. That's clearly no longer the case,' said Katherine Waller, the co-founder of the wealth manager Six Degrees.
'Since then, the threshold has been significantly reduced. The fact the rate itself has fallen is a minimal concession in that broader context. A far greater proportion of the workforce is now captured — far beyond what was originally intended.'
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Waller added that many families were still adjusting to a 'new normal' of higher costs and rates. She added: 'In theory, the additional rate should apply to those with significant earnings and the corresponding lifestyle. In that context, a salary of £125,000 doesn't stretch as far as it once did.'
Polling by the think tank More In Common found that while overall life satisfaction was highest among those earning more than £100,000 a year — on average they gave their satisfaction 9.1 out of 10 — only 46 per cent said they felt 'very comfortable' financially. Another 46 per cent described themselves as 'relatively comfortable', while 7 per cent said they could cover essentials but had no room for luxuries.
Adrian Anderson from the mortgage broker Anderson Harris said: 'The general feeling I get now from clients earning £125,140 a year is that they feel worse off in real terms than they were in 2015. People face higher taxes, higher interest rates and higher basic living expenses, so they have less disposable income.'
He said that even very wealthy clients were now thinking twice about stretching their borrowing when it came to housing costs. He added: 'I used to see additional-rate taxpayers sending children to private school, but now it feels like both parents have to earn a six-figure salary to manage school fees and higher mortgage costs.'
Once your income passes £125,140, you lose nearly half of any pay rise or bonus. That's because your marginal tax rate, what you pay on any extra £1 earned, is 47 per cent — 45 per cent income tax and 2 per cent national insurance.
If you're also repaying a student loan, you typically pay another 9 per cent, bringing your total marginal rate to 56 per cent.
At the same time, various forms of government support and tax reliefs disappear above certain income levels. They are mostly gone by the time you become an additional-rate taxpayer.
Child benefit, worth £26.05 a week (£1,354.60 a year) for a first child and £17.25 a week (£897 a year) for other children, starts to be lost when one parent earns more than £60,000 a year. You lose it entirely once one parent earns £80,000.
Tax-free childcare — where the government tops up £2 for every £8 spent on certain kinds of childcare, including nursery, childminders and after school clubs — is worth up to £2,000 per child a year. Entitlement is lost once one parent earns more than £100,000 a year.
Families where one parent earns more than £100,000 also lose access to 15 or 30 hours of government-funded childcare during term time. Children aged nine months up to three years lose all their free childcare, and children aged three and four get only 15 hours instead of 30.
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The average cost of a full-time (50 hours a week) nursery place for a child under two in England is £341.36 a week, according to the children's charity Coram. This means 30 hours of free childcare across 38 weeks of term time is worth £7,783 on average.
Your personal allowance — the £12,570 chunk of income you can earn tax-free each year — starts to be cut once you earn more than £100,000 a year too. For every £2 earned above the threshold, you lose £1 of allowance. It's fully withdrawn by £125,140, when you begin paying the highest rate of tax.
This gives workers earning between £100,000 and £125,140 a marginal income tax rate of 60 per cent. With 2 per cent national insurance and 9 per cent student loan repayments, the effective marginal rate could be 71 per cent, leaving you just 29p from every extra £1 earned. And that's before you factor in any lost childcare help.
Additional-rate taxpayers also get no personal savings allowance, meaning they pay income tax on any interest from savings, unless the money is held in an Isa. Higher-rate payers can earn £500 a year in interest tax-free and basic-rate payers £1,000.
The income you can earn each year from dividends before paying tax has also slashed from £2,000 in 2022-23 to £500. Additional-rate taxpayers pay 39.35 per cent on anything they make over this threshold (compared with 33.75 per cent for higher-rate taxpayers and 8.75 per cent for basic-rate taxpayers).
A similar clampdown has happened on capital gains tax (CGT), which is charged on profits made from the sale of most assets. You used to be able to make up to £12,300 a year tax-free, but this was cut to £6,000 in April 2023 and halved again in April 2024. Higher and additional-rate taxpayers pay 24 per cent CGT on gains made above £3,000 a year, while basic-rate taxpayers pay 18 per cent.
The final blow comes when earnings hit £200,000. At that point, workers begin to lose their £60,000 annual pension allowance, the maximum they can contribute to a pension each year while still receiving tax relief.
The Treasury said: 'We are protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of income tax, employee national insurance or VAT. That's the Plan for Change — protecting people's incomes and putting money into people's pockets.'
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Many high earners mitigate the tax burden by keeping their taxable income below key thresholds. This is usually done by saving more of your income into a pension, because all the thresholds above are based on your 'adjusted net income', which is your annual earnings (including bonuses) minus pension contributions and donations made to charities through Gift Aid.
Jason Hollands from the wealth manager Evelyn Partners said additional-rate taxpayers often sacrificed bonuses or pay rises in exchange for increased employer pension contributions. 'Pension contributions are exempt from income tax and national insurance,' he said. 'This can help keep earnings below £125,140.'
In many cases, it's worth going further. The most punitive cliff-edge comes at £100,000, where multiple benefits are lost and the personal allowance begins to reduce. As a result, some additional-rate taxpayers keep their income below this level through large pension contributions.
'It all depends on your living costs and personal circumstances,' said Chris Etherington from the accountancy firm RSM UK. 'If you're on £130,000 a year and have young children, it may make sense to cut your taxable income to below £100,000 to keep free childcare hours and your tax-free allowance. But it could make day-to-day cash flow tighter.'
Calculations from RSM UK show that someone earning £130,000 would pay £44,703 in income tax. If that person paid enough into their pension to keep their income below the £100,000 threshold, they would pay £11,271 less in income tax.
If they had a young family they could actually end up with more disposable income as a result because they would keep their childcare benefits. The 30 free childcare hours for two children under three would be worth £15,566 a year on average if they were in full-time, and tax-free childcare would be worth £4,000. Combined with the tax saved, that's £30,837, more than making up for the £30,000 saved into their pension, which has the potential to be boosted by tax relief and employer contributions.
If income from savings, investments or property are pushing you over the £125,140 threshold and you are married or in a civil partnership, it could be worth transferring ownership of the assets to your partner if they are in a lower tax bracket. Transferring assets between spouses is tax-free, and so it could reduce the household's overall tax bill.
Sean McCann from the wealth manager NFU Mutual said: 'One other area not to overlook is gifts made to charity via Gift Aid. These reduce your income and, in some circumstances, can help restore some or all the tax-free allowance and lower your tax bill.'
Other tax-efficient investment options include venture capital trusts (VCTs) and enterprise investment schemes (EIS). These are government-backed schemes designed to encourage investment into small, early-stage companies.
If you hold a VCT for five years and an EIS for three, you can claim 30 per cent income tax relief for each year. However, these are high-risk, niche products, so it's worth seeking financial advice before you make any moves.
Hollands added: 'A six-figure salary has less wow factor than it did in the past, and a great many additional-rate taxpayers won't feel especially wealthy because the cost of living, higher mortgage costs and growing tax burden mean that the disposable income that can be used on the nice things in life won't be what it was in the past.'
Suman Paul earns more than £126,000 a year, which should make him an additional-rate taxpayer. But Paul, an NHS consultant from Warrington in Cheshire, avoids the 45 per cent top rate of tax by making sure his income stays below the £100,000 cliff-edge.
This means he keeps his tax-free personal allowance and still gets tax-free childcare for his daughter.
'Once you cross the £100,000 mark you start getting into marginal tax rates of 60 per cent, so that is one very inefficient tax trap that I want to avoid,' said Paul, 39. 'My daughter is also three and a half so we have to pay for nursery. We use the government's tax-free childcare scheme that gives you £2 for every £8 you spend. If we lose that, it would cost us more than £1,000 a year.'
To manage his income, Paul pays for a car through his employer via salary sacrifice. It costs him £6,000 a year, which gets deducted from his salary pre-tax and reduces his taxable income. He also pays about £1,000 a month into his NHS pension and puts extra into his self-invested personal pension to bring his adjusted net income down further.
Despite having an income that pushes him above the additional-rate threshold, Suman doesn't feel as if he lives a life of luxury. He said: 'It's a middle-class life. I can afford my mortgage, but my take-home pay does not feel like a lot.
'After paying all the fixed costs — mortgage, childcare, pension, car costs, bills — our disposable income is about £1,000 a month. And my wife is also a working professional. If I was a single earner, it would be much harder.'