High earners taking home £100,000 a year who have young children face losing £12,000 even after Labour’s Budget on Wednesday.
The Labour Budget is finally almost here, bringing to an end weeks of fervent speculation about what might be taxed, what thresholds might change and where all the money is going – other than the £22bn black hole of course.
Though Labour has promised not to raise VAT, National Insurance or Income Tax for ‘working people’, the party has struggled to define exactly who a working person actually is.
But in the current system, there is a cliff edge for high earning working parents which means a £2,000 payrise taking someone to £102,000 per year can cost you £12,000.
Quizzed on whether people earning £100,000 are ‘working people’, Care minister Stephen Kinnock refused to answer, prompting speculation that those over that threshold are set to be hit with a tax raid – or at least, that Labour is not planning to do anything to fix this tax trap for high earners.
Currently, thanks to quirks in the tax system, earners taking £100,000 to £102,000can already pay a marginal tax rate of a blistering 600 percent. A parent with two children who receives a pay rise taking them over £100,000 a year after pension contributions could find themselves facing a cliff edge: they lose the £12,570 tax free Personal Allowance completely and they lose tax-free childcare.
AJ Bell’s Charlene Young said: “While an income of over £100,000 sounds a lot, there are huge penalties built into the tax system, which means take-home pay is nowhere near what some people might imagine. For a lot of people, the net outcome of earning more than £100,000 is that they’re only marginally better off — or in some cases worse off — than they would be on a smaller salary.”
If a parent with one child aged two and another aged nine months earned £99,000 but was then given a bonus or a pay rise of £2,000 which brought them to £101,000, they would lose nearly £10,000 and have a top marginal tax rate of almost 600 per cent, according to AJ Bell.
They would lose £400 of Personal Allowance, which tapers off over £100k, £4,000 of tax-free childcare, £3,285 for 15 free childcare hours and £3,444 for the younger child, and the parent then pays £800 more in Income Ta.
That £2,000 payrise than loses the parent £11,940, or a 597 percent tax rate.
Even if Labour doesn’t change the system at all in its Budget on Wednesday, it will be making a conscious decision to keep this 597 percent tax trap for high earners in place and continue to hit high earning parents with such a financial penalty.
