Two million taxpayers to be hit by £100k tax trap by 2026/27

The number of Brits earning six-figure salaries is set to exceed two million for the first time in the 2026/27 tax year, pulling tens of thousands more workers into an effective 60% tax rate.

Around 2.06 million taxpayers – around 6% of the total UK workforce – will earn above £100,000 in the next tax year, according to a Freedom of Information request of HMRC’s estimates by wealth manager Rathbones.

That is an increase of 5.7%, or around 112,000 individuals, from HMRC’s current estimate for the 2025/26 tax year of 1.95 million.

When placed in the context of the last five years, the latest estimates show the number of people earning £100,000 or above are expected to have increased by around 69% (842,000 people) between 2021/22 and 2026/27.

As wages rise, more people than ever before will be subject to a quirk of the tax system that means they can be paying an effective 60% tax rate on their earnings.

While the top rate of income tax is 45% in the UK (excluding Scotland), those who earn over £100,000 will start to see their tax-free personal allowance of £12,570 gradually reduce.

It starts to taper when you earn £100,000 at a rate of £1 for every £2 worth of income over this threshold. It is completely lost once you earn £125,140 a year, meaning people are subject to an effective 60% tax rate while their earnings are within this range.

For example, if your pay increases from £100,000 to £110,000, you would pay 40% in tax on the £10,000 pay rise, which is £4,000. However, you would also lose £5,000 of your personal allowance.

The 40% rate would then apply on that £5,000 – equating to £2,000 in tax. You are therefore paying £6,000 in tax on the extra £10,000 – which is an effective tax rate of 60%. You lose the personal allowance entirely at £125,140, and will need to pay the 45% additional tax rate on income above this threshold.

Parents on £100,000 penalised further

But that is not all. High-earning parents are penalised even further. If your income is just £1 over £100,000, you can lose childcare support as all entitlement to tax-free childcare and free childcare hours is lost. Rathbones estimates this to be worth almost £20,000 for parents with two children under five.

Olly Cheng, senior financial planning director at Rathbones, said: “Earning £100,000 once felt like financial freedom, but today it often comes with a hidden tax sting. Frozen thresholds are inflating tax bills, dragging more people into higher bands, while inflation erodes the real value of earnings.

“This has created a generation of HENRYs – high earners, not rich yet – where those on strong salaries struggle to build wealth because of the double hit of a growing tax burden and the corrosive effect of inflation.”

Frozen tax thresholds mean more people than ever will pay 60% tax rate

Since the 2022/23 tax year, income tax thresholds have been frozen after the then-chancellor Rishi Sunak announced tax bands would not be adjusted yearly with inflation, as had previously been the norm.

The freeze was extended until the 2027/28 tax year by Tory chancellor Jeremy Hunt. It was then extended again until the 2030/31 tax year by Labour chancellor Rachel Reeves in the 2025 Autumn Budget.

By freezing income tax bands, rather than adjusting them for inflation, people are ‘dragged’ into higher tax brackets when their earnings increase. This phenomenon is known as fiscal drag. It is often called a “stealth tax”.

With tax thresholds now frozen until at least 2030/31, more people will be dragged into the effective 60% tax rate as thresholds remain at 2022 levels. This is despite eight years of inflationary pressures making £100,000 mean less in real terms.

Cheng at Rathbones added: “Fiscal drag has become one of the most damaging factors affecting the cost of living. What was once considered a ‘stealth tax’ is now widely understood and much maligned.”

Can you avoid the 60% tax trap?

With an effective marginal tax rate of 60% on each pound you earn between £100,000 and £125,140, many high-earners will be asking whether they can avoid the tax trap.

The good news is that there are ways to avoid a 60% tax rate – but you won’t necessarily have more in your pocket immediately.

One option is to give up a portion of your salary, if you’re still working, and add it into a workplace pension through salary sacrifice, thereby reducing your annual pay.

Cheng at Rathbones said: “One of the simplest ways to avoid or limit the impact of the 60% income tax trap is to pay more into your pension. Doing so via salary sacrifice not only saves on income tax but also National Insurance for both employee and employer, making it a more tax-efficient way to boost pension savings compared to personal contributions.”

This can be done through either an employer pension scheme, or through a self-invested personal pension (SIPP).

If you are a parent, sacrificing your salary to keep your adjusted net income below the £100,000 threshold may mean you retain your eligibility to the tax-free childcare scheme.

Another way to avoid the 60% tax trap is to donate to charity as Gift Aid contributions lower your adjusted net income in the same way that pension payments do.

Cheng explains: “If your workplace permits it, you can also use salary sacrifice to make charitable contributions or exchange part of your salary for non-cash benefits, such as private medical insurance, which further reduces your adjusted net income. National Insurance savings apply here too.”

Finally, you can also make the most of share loss relief if you have qualifying shares and offset your losses against your income, bringing it below the £100,000 mark.

Cheng said: “If you subscribed for qualifying shares – such as those in an Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) company – and they fall in value, you can elect to offset the loss against your income rather than capital gains.

“This means the loss reduces your taxable income at your marginal rate, which for higher earners can potentially save a significant amount in tax.”