Andy Burnham's bid for Labour leadership has sparked renewed calls to tackle the long-standing "£100k tax trap" in the UK's income tax system. Critics argue that this complex anomaly creates a 60% marginal tax rate for higher earners, discouraging professionals from working overtime or taking on extra shifts.
The issue arises when individuals' incomes exceed £100,000, leading to a gradual withdrawal of their personal allowance and effectively creating a tax disincentive within the £100k-£125,140 income bracket. Economists contend that this inefficiency drives tax planning and encourages individuals, including doctors, to opt out of extra work or even reduce their working hours.
Mr Burnham has acknowledged public concerns over being "overtaxed", with many expressing frustration at the frozen £12,570 personal allowance. A £1,000 increase would come at an estimated annual cost of £10 billion, posing a significant challenge for public finances and sparking suggestions that any broad tax cut could be funded by measures targeting higher earners.
Commentators propose abolishing the £100,000 taper entirely, replacing it with a simplified system that increases the personal allowance for all taxpayers. To offset the costs, they suggest introducing a new 50p rate for incomes above £150,000 and lowering the threshold for the 45p additional rate to around £90,000. This package could be fiscally neutral and alleviate the "hidden complexity" of the current system.
Such a move would shift the burden of higher taxation onto a smaller segment of the population, making the tax code more transparent and addressing the perceived unfairness of the current "tax trap". The debate underscores the challenge facing any incoming government to balance fairness, simplicity, and fiscal responsibility in the UK's tax system.
With around 95% of taxpayers earning below £90,000, a simplified system would likely benefit a wide range of voters. Politically, this could prove an attractive approach for Mr Burnham as he seeks to appeal to the broader electorate.