‘Tax trap’ forces up to 250,000 higher earners to pay 60% rate

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As many as 250,000 people will have to pay income tax rates of more than 60% this year, and thousands more will do so from next April.

Anyone earning between £100,000 and £118,880 will have to pay 62% tax on some of their income after the Government’s decision to increase the personal tax allowance to £9,440. The 62% tax rate, which falls back to 40% at £118,880, follows Labour’s decision to phase out the personal allowances for people earning more than £100,000 just as the recession was starting in 2008-2009.

Next year, another 10,000 taxpayers will also be drawn into paying this high tax rate as the allowance rises to £10,000 and the band increases to £120,000. Under this anomaly they will pay tax at a higher rate on this bracket of income than the 45p rate that top earners pay on earnings of more than £150,000.

This 60 per cent rate results because the basic personal allowance is withdrawn at the rate of £1 for every £2 over £100,000 until the basic personal allowance has disappeared. So the offending £2 will bear tax of its own at 40 per cent, that is 80p, and also trigger the removal of tax freedom (through the basic personal allowance) on another £1 giving rise to an additional 40p of tax.

Tax rates as high as 73% are being paid by families on more modest incomes of £50,000 to £60,000 following George Osborne’s move to withdraw child benefit from high earners.