It is astonishing that the 60 per cent tax trap laid a whole decade-and-a-half ago remains.
In April 2009, against a backdrop of emergency financial crisis measures, Chancellor Alistair Darling announced the personal allowance would start to be removed at a rate of £1 for every £2 earned above £100,000.
This created Britain’s highest effective income tax rate of 60 per cent.
It is widely considered to be one of the most perverse and unfair bits of our tax system. And yet, nearly 15 years and seven Conservative Chancellors later, the 60 per cent tax rate remains in place.
Sting: The removal of the personal allowance creates a 60% income tax trap between £100,000 and £125,140
It’s not an official income tax rate, of course. Those are currently 20 per cent, 40 per cent and 45 per cent.
But really the income tax system is structured in a way that the rates go 20 per cent, 40 per cent, 60 per cent, 45 per cent.
Someone on £100,000 may be earning lots of money, but those in this bracket pay a higher marginal tax rate – the one incurred on the next pound earned – than people who get paid far more.
The current 60 per cent bracket runs between £100,000 and £125,140, at which point the personal allowance is completely gone and the marginal tax rate swaps back to 45 per cent.
It works like this. If someone earns £100,000 and gets a £5,000 pay rise, they will lose 60 per cent to income tax. Whereas, if someone earns £200,000 and gets a £5,000 pay rise, they will lose 45 per cent of it to income tax.
Clearly, this is nuts.
What makes it even crazier is that the £100,000 threshold hasn’t budged. If it had risen with inflation since 2009, it would now be £153,000.
So, why on earth hasn’t anything been done about this?
I think the answer mainly lies in two elements:
Firstly, it’s very difficult to garner sympathy for people earning £100,000 a year.
Secondly, politicians have spent the post-financial crisis years terrified of doing anything with tax that might be seen to favour rich people – even if that tax is obviously stupid.
And so, for 15 years a bad tax has not just remained in place but managed to get even worse due to fiscal drag.
Politicians are terrified of doing anything with tax that might be seen to favour rich people – even if that tax is obviously stupid
A similar issue has also been ignored further down the income scale with the removal of child benefit between £50,000 and £60,000.
This creates a marginal tax rate of 51 per cent for a parent with one child or 59 per cent if they have two children.
It affects couples where just one parent’s income breaches that level – although both could earn £49,999 and they’d be fine.
Again, the threshold hasn’t moved in the eleven years since George Osborne introduced the taper, if it had it would stand at £67,000.
As you may have guessed from a column that started with a throwback to 2009, these tax traps are not new news.
You’ll have heard me moan about them before too. This kind of unfair treatment that undermines the tax system is a pet peeve of mine and I’ve been banging on about both for years.
What’s interesting now is that a groundswell of opinion seems to be forming that we should get rid of these tax traps.
The general tone of the reader comment debate on our articles about child benefit removal and the 60 per cent tax has shifted from a lack of sympathy for high earners to annoyance and anger at these pernicious parts of the tax system.
That’s in evidence in the comments on Steve Webb’s latest column where he answers a reader question about whether paying into a pension can beat the 60 per cent tax.
Surely a Chancellor must eventually be brave enough to fix this mess?
The next Budget is now less than a month away, so will Jeremy Hunt be that bold Chancellor?