The call for tax reform by a group of prominent economists, led by Lord O'Neill, has shed light on the pressing need to simplify the UK's complex tax system. At its core is the contentious '£100,000 tax trap', a feature that critics argue stifles ambition and investment across the country by imposing an effective marginal tax rate of up to 60 per cent for many taxpayers.
A total of approximately 2.06 million individuals are expected to earn over £100,000 in the coming year, according to HMRC projections, highlighting the widespread impact of this issue. The 'tax trap' creates a steep cliff edge beyond this threshold, where personal allowances are gradually withdrawn, leading to financial hardship for families with young children who lose access to crucial childcare support. Moreover, some individuals are reportedly altering their working patterns – declining promotions, refusing bonuses, or increasing pension contributions – specifically to avoid crossing the £100,000 threshold.
Addressing this 'cliff edge' by introducing a more gradual tapering of personal allowance withdrawal and ensuring thresholds keep pace with inflation is widely regarded as a measure that would foster growth, ambition, and investment within the UK economy. However, concerns have emerged regarding potential suggestions to increase Capital Gains Tax (CGT) rates to align more closely with income tax.
According to an analysis by IG, based on HMRC's own published behavioural assumptions, increasing CGT rates could lead to a substantial annual revenue deficit of almost £8 billion for the Treasury. This is because higher CGT rates may deter investors from selling assets, resulting in fewer taxable disposals and ultimately reduced tax income.
Experts warn that making investment less attractive through higher taxation could undermine efforts to strengthen capital markets and build national wealth. The UK already lags behind many comparable nations in terms of retail investment, and further disincentives could exacerbate this disparity, potentially sending a detrimental signal to investors at a time when the government aims to boost productivity and support UK businesses.
Source: IG, HMRC