{"text":[[{"start":6.16,"text":"Days before her second baby is due, Charlotte James is still hard at work, fuming at the rules that make some of England’s better-paid employees much worse off for every extra pound they earn."}],[{"start":16.88,"text":"James, chief of staff at a skincare company, has delayed her maternity leave until the last minute in order to use as much of it as possible to look after the baby once they arrive, because of the combination of sky-high marginal tax rates and the cost of childcare."}],[{"start":31.08,"text":"“We just feel totally trapped by the system,” she says. While her husband has a well-paid job as a doctor in the NHS, “he can’t take on any more shifts even though he wants to”."}],[{"start":41.88,"text":"The trap she is talking about is England’s £100,000 earnings threshold, above which many people suffer two big hits to their income, pushing increasing numbers of the country’s most qualified and productive workers to withhold their labour from the economy."}],[{"start":56,"text":"Those earning more than that amount each year do not just have to contend with a 62 per cent rate of marginal taxation, among the very highest in the industrialised world. They also face the abrupt withdrawal of childcare benefits that can be worth tens of thousands of pounds a year."}],[{"start":null,"text":""}],[{"start":70.92,"text":"Taken together, the swingeing tax rates and costly nursery fees can saddle higher earners with an effective marginal rate well over 100 per cent if their pay passes the £100,000 mark, leading many to limit how much they work, according to an in-depth study and an FT reader survey."}],[{"start":87.6,"text":"“I would have to earn over £145,000 before I was better off than [at] just under £100k,” writes Jonathan Breeze, one of hundreds of respondents to the survey."}],[{"start":97.32,"text":"Other responses reveal that some of the UK’s most skilled workers in healthcare, law and finance have taken extreme measures to avoid the cliff edge. These range from cutting down on working hours and refusing promotions to salary sacrifice — reducing cash pay in exchange for non-cash benefits — and increasing charity donations. Some have even moved abroad."}],[{"start":null,"text":""}],[{"start":118.36,"text":"According to an FT analysis, almost 1mn people are set to be caught in the £100,000 trap by the 2030-2031 tax year."}],[{"start":126.72,"text":"The FT revealed this month that the number of people hit by the threshold has increased by 85 per cent over the past four years to 727,000, according to HM Revenue & Customs data provided in response to a freedom of information request."}],[{"start":142.8,"text":"The FT analysis shows that figure will increase to 950,000 if the cohort grows in line with the increase in the number of top-rate taxpayers forecast by the Office for Budget Responsibility, the independent fiscal watchdog."}],[{"start":null,"text":""}],[{"start":157.64,"text":"Those affected by the threshold are comfortably in the top 10 per cent of earners in the UK, with full-time salaries far above the national average. Some might say they can afford to pay more in taxes or receive fewer benefits. But £100,000 is just one of several points in the British tax system where marginal rates shoot up, disincentivising work."}],[{"start":180.12,"text":"Such spikes, which range across society, hitting different ages and income groups, are partly the result of a generation of politicians’ focus on keeping down the headline tax rates that can win or lose elections. Governments have also sought to ensure that people on average incomes are not overburdened at a time when the government’s tax take as a percentage of GDP has steadily risen."}],[{"start":203.12,"text":"One painful threshold, potentially affecting more than 5mn people in a government student loan programme, occurs at £29,385. Those in the scheme who earn less than that amount do not have to make any loan repayments. Those earning more face automatic deductions of 9 per cent of their income — in effect a nine percentage point addition to their tax rates above the threshold."}],[{"start":226.56,"text":"Another increase occurs at £50,270, where a worker’s marginal tax jumps from 28 per cent to 42 per cent."}],[{"start":235.32,"text":"Research published last month by the Centre for the Analysis of Taxation, a think-tank known as CenTax, shows that such punitive thresholds are leading taxpayers to withhold part of their labour from the economy."}],[{"start":247.24,"text":"An analysis based on anonymised tax records of parents of three- and four-year-olds in 2022, the most recent year for which the data exists, suggests that many people hold their income just below the thresholds, with most bunching around the £50,000 mark as well as just short of £100,000."}],[{"start":null,"text":""}],[{"start":265.48,"text":"The data not only signifies that large portions of society have modified their behaviour so as to avoid high marginal rates of tax and loss of benefits; in many instances it also means fewer hours worked and less impetus to the country’s often anaemic economy."}],[{"start":280.48,"text":"The impact is uneven. The self-employed and owner-managers are generally more able to manage their income to hold back their taxable earnings and avoid higher tax rates. By contrast, the vast majority of regular employees simply take a double hit on spiralling tax and childcare costs."}],[{"start":297.8,"text":"If anything, the problem is accelerating, with hundreds of thousands more people set to be caught in Britain’s tax traps. This is largely due to a policy by Conservative and Labour governments alike of “fiscal drag” — the decision to increase tax revenues almost by stealth by declining to increase thresholds in line with inflation."}],[{"start":317.4,"text":"As John Healey, chancellor of the exchequer, prepares for his maiden Budget on October 28, any change seems far away."}],[{"start":324.88,"text":"Britain’s Labour government seems defined by its fiscal straits, with too much debt, too many spending obligations and too little income to allow for much state largesse. The government is set to maintain the freeze on thresholds — without accounting for inflation — until the end of the decade."}],[{"start":341.56,"text":"“We are protecting payslips by keeping our promise not to raise income tax, national insurance or VAT,” says a Treasury spokesperson."}],[{"start":null,"text":""}],[{"start":349.92,"text":"While Conservative leader Kemi Badenoch has called for an end to the £100,000 earnings cap on help with childcare, CenTax director Arun Advani says that over the years it has become “far more costly” to fix the issue."}],[{"start":363.24,"text":"He adds that “even though it is causing real distortions, it seems highly unlikely that a policy helping higher earners will be high on the priority list” for Andy Burnham’s government."}],[{"start":373.4,"text":"Ahead of next week’s Budget, the FT’s interactive calculator provides an estimate of how much fiscal drag is set to cost Britain’s workers, as the tax traps suck in more people, raising effective rates along with inflation. The impact on workers can vary markedly depending on how close an individual’s earnings are to a tax threshold."}],[{"start":null,"text":""}],[{"start":373.9,"text":"Some people are already reaching their own conclusions."}],[{"start":391.96,"text":"Michael, a financial services professional based in London, says in the survey that he has decided not to apply for promotions, since his marginal tax rate would jump to 62 per cent for any earnings between £100,000 and £125,140. “What’s the point,” he adds. “I’d end up doing a lot more work with a lot more responsibility to give most of the money to the government.”"}],[{"start":392.46,"text":"The back-story"}],[{"start":419.52,"text":"The £100,000 threshold has its origins in the global financial crisis. Chancellor Alistair Darling announced the provision in 2009 to raise revenue as part of the then Labour government’s response to the economic downturn."}],[{"start":null,"text":""}],[{"start":433.52,"text":"Soon after the measure’s introduction in the 2010-11 financial year, Darling was succeeded by the Conservatives’ George Osborne who, like all chancellors since, retained the threshold and kept it fixed at £100,000."}],[{"start":448,"text":"The provision — which technically reduces every worker’s personal tax-free allowance by £1 for every £2 they earn over £100,000 — has never been uprated in line with inflation. That means that, as pay gradually rises, thousands more workers each year are subject to higher marginal tax rates."}],[{"start":448.5,"text":"Other tax thresholds were frozen following the 2022-2023 tax year, as cash-strapped governments reeled from the impact of the Covid-19 pandemic and sought to raise funds without breaking manifesto commitments by increasing headline rates."}],[{"start":449,"text":"The FT has adjusted historical tax thresholds for inflation to reveal how much a combination of fiscal drag and changes in personal income tax rates has affected workers since the financial crisis."}],[{"start":null,"text":""}],[{"start":449.5,"text":"Recent government policy has consistently been aimed at reducing the impact of tax on lower earners at a time of historic low wage growth. Achieving this has increasingly placed the load on higher — not just the highest — earners. The level at which people start paying tax — the personal allowance — is also higher than in other G7 countries."}],[{"start":450,"text":"“The personal allowance is reduced for those with incomes over £100,000 to ensure support is focused where it’s most needed, including funding public services,” says the Treasury spokesperson."}],[{"start":450.5,"text":"Because the effective marginal rate goes back down to 45 per cent after £125,140, the very highest earners are less affected by the £100,000 cliff edge, although they pay around £5,000 they would not have to if it did not exist."}],[{"start":464.92,"text":"By contrast, the big increase in marginal rates at just above £50,000 now hits people who are among the top 20 per cent of earners rather than the top 10 per cent — as of 2024, it kicks in at the 81st income percentile rather than, as was the case in 2010, the 89th income percentile."}],[{"start":481.6,"text":"The childcare cliff edge"}],[{"start":483.76,"text":"Childcare benefits for parents of pre-school children in England and Wales have risen in recent years. But since 2017 they have been pegged to the £100,000 upper earnings limit that, like the income tax taper, has never been uprated in line with inflation."}],[{"start":499.8,"text":"In 2019, Liz Truss, then chief secretary to the Treasury and later prime minister, told parliament that the income threshold for childcare support was deliberately fixed at the £100,000 level because “it is simple for parents to understand their eligibility, and because it aligns to an existing boundary in the tax system”."}],[{"start":519.52,"text":"Setting the threshold at the level where the highest marginal tax in the UK kicks in may reduce the number of cliff edges in the country’s income distribution. But it creates by far the biggest hit to people’s earning power."}],[{"start":531.8,"text":"The combination of the taper and the withdrawal of free childcare provision could take a worker’s effective marginal tax rate far beyond 100 per cent if their income exceeds the threshold."}],[{"start":542.08,"text":"For example, a £1,000 pay rise for a parent earning £99,500, with children aged one and two attending nursery, could trigger the potential loss of more than £20,000 worth of childcare. Together with extra tax of £520, that would yield a staggering effective marginal rate of over 2,000 per cent."}],[{"start":563.04,"text":"In Scotland, things are different. Although higher tax rates mean the effective marginal income tax rate between £100,000 and £125,140 is even higher than in England, at 69.5 per cent (including employee NICs), all parents of three- and four-year-olds are entitled to roughly 30 hours a week of funded childcare during term time regardless of income."}],[{"start":586.52,"text":"While childcare support was originally just focused on improving early education, the policy England introduced in 2017 had a second aim: encouraging more parents, many of them women, into the workforce."}],[{"start":598.28,"text":"However, for some it has precisely the opposite effect, says Christine Farquharson, associate director at the Institute for Fiscal Studies, a think-tank: “This is the most obvious place where the system is encouraging people to work less, which is counter-productive given its stated aims.”"}],[{"start":null,"text":""}],[{"start":616.4,"text":"The decision to freeze the childcare threshold in nominal terms has kept it almost £38,000 lower than it would be if it had increased in line with inflation, leaving more parents affected by the policy at the same time as childcare costs have surged."}],[{"start":631.86,"text":"Farquharson says the UK government has amplified the distortionary effect of the threshold by rolling out increased support for working parents with children aged nine months to two years over the past few years."}],[{"start":644.12,"text":"“That means you’re now looking at three or four years of lost childcare subsidies, instead of 18 months or two years,” she adds. “If you have multiple young children in London, you can require earnings many, many tens of thousands [of pounds] higher than the £100k cliff edge before you’re made whole on your childcare costs.”"}],[{"start":661.88,"text":"Responses to the FT survey also indicate that many women believe the structure of the childcare support has hindered their career prospects."}],[{"start":669.52,"text":"Some respondents have turned down promotions or reduced their hours to keep earnings below £100,000; others have stopped work to look after children because their higher-earning partner has breached the income threshold."}],[{"start":681.92,"text":"This is because the threshold is triggered by just one partner earning £100,000. A couple in which one person earns £120,000 and the other does not work pays 50 per cent more in income tax and national insurance than a couple where both earn £60,000."}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":698.56,"text":"The thresholds hit Londoners most of all"}],[{"start":701.1,"text":"The income thresholds are national but apply to very different local income and expenditure scenarios."}],[{"start":706.48,"text":"According to data from the UK’s Office for National Statistics, the median London full-time worker is on the cusp of qualifying for the higher income tax rate that kicks in at £50,270."}],[{"start":718.52,"text":"But workers in the capital face much higher childcare costs than the rest of the country. That makes the loss of funded childcare even more difficult."}],[{"start":727.04,"text":"“£100,000 sounds like a lot of money, but in London the nursery fees are insane,” says Charlotte James."}],[{"start":732.64,"text":"“If my husband earns even one penny over £100,000, our nursery fees more than double in cost,” she adds. She calculates that when she returns to work full time, her nursery costs will rise to £3,000 a month, in part because her second child will not be eligible for any benefits."}],[{"start":null,"text":""}],[{"start":750.9,"text":"For some people in London, the percentage of pay that the government docks from their wage can top 50 per cent, even if they are not particularly well paid by the standards of the capital."}],[{"start":760.44,"text":"Technically, student loan repayments are not a tax. But they are deducted directly from pay as a percentage of earnings."}],[{"start":767.98,"text":"Under the Plan 2 loan system, a graduate earning slightly more than the average pay for the city will face an effective marginal rate of 51 per cent — the total of the 40 per cent higher tax rate, 9 per cent loan repayment rate and 2 per cent National Insurance."}],[{"start":784,"text":"At £100,000, the effective marginal rate goes above 70 per cent, with the potential to rise well above 100 per cent if the former student is using state-funded help for childcare."}],[{"start":795.72,"text":"James Stanford-Beale, a regional manager from Oxford participating in the FT survey, says he does not qualify for nursery funding because he earns just over £100,000. In addition, student loan repayment has left him with what he calculates as an effective tax rate of 72 per cent."}],[{"start":813.72,"text":"He says: “It makes absolutely no sense for me to spend more time away from home, missing bath time, missing bedtime, putting more work on to my wife in order to be getting kudos from management at work and little in the way of financial compensation.”"}],[{"start":null,"text":""}],[{"start":814.22,"text":"The final reckoning"}],[{"start":828.16,"text":"While it is clear that England’s income thresholds are distorting the country’s labour market, the true cost is unknown."}],[{"start":835.74,"text":"The Treasury acknowledged in a response to a freedom of information request from the campaign group TheyWorkForYou last year that it did not have any estimates of tax revenue lost from parents keeping their income below the £100,000 threshold."}],[{"start":849.08,"text":"However, following an FT freedom of information request, HMRC revealed last week that the number of taxpayers with an adjusted net income of between £98,000 and £99,999 rose from 61,000 to 95,000 in only the five years to 2024, an increase of 55 per cent."}],[{"start":null,"text":""}],[{"start":867.48,"text":"In recent weeks a leaked dossier revealed that the government of former prime minister Sir Keir Starmer looked at proposals to soften the £100,000 tax trap but dropped the plans after failing to convince the budget watchdog it would significantly boost tax receipts."}],[{"start":null,"text":""}],[{"start":884.02,"text":"But the true cost goes far beyond the expense to the exchequer, affecting instead the wider economy and the use of skills that have often been built up over decades."}],[{"start":893.92,"text":"According to both the FT’s own survey and CenTax’s research, professionals in three fields are particularly affected by the £100,000 threshold: finance, law and healthcare."}],[{"start":906.54,"text":"Those in the last category often have the least scope to rein in their taxable income without taking extreme measures."}],[{"start":913.24,"text":"NHS staff, particularly those operating in areas such as accident and emergency, may not be able to use the same salary sacrifice devices to reduce take-home pay as doctors with more opportunities to carry out private consulting work. Instead, one of the only options remaining to them is simply to reduce their hours."}],[{"start":null,"text":""}],[{"start":932.938,"text":"Dr Emma Runswick, deputy chair of the British Medical Association, says the childcare threshold has created “an absurd situation” where many doctors are disincentivised to work “at a time when the NHS needs them more than ever”."}],[{"start":946.68,"text":"“[The threshold] is frustratingly most likely to be breached at around the time in doctors’ lives when those who are parents have pre-school-age children and need child care,” she adds."}],[{"start":957.08,"text":"“Much additional work needed to get through the NHS backlog or to fill rota gaps in busy emergency departments falls during antisocial hours and weekends, when childcare is necessary and more expensive.”"}],[{"start":968.84,"text":"An FT survey respondent called Emma makes a broader point."}],[{"start":973.04,"text":"“The £100k cliff edge is crippling,” she says. “It removes the desire to improve your life, it damages your child’s access to childcare, education and time with their peers and it punishes women who are being forced out of work.”"}],[{"start":988.16,"text":"Additional reporting by Claer Barrett, Jamie John and Kadhim Shubber. Fiscal drag calculator design and development by Ændra Rininsland, Tomoya Suzuki, Alan Smith, Chesca Taylor and Max Köhler"}],[{"start":1000.88,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1792775872_5031.mp3"}