Why £100,001 is the worst salary you could earn

Earning six figures has long been a vaunted goal. But not only has the rising cost of living and soaring property prices eaten away at its real value, but getting a raise can also land you with less than you started with.

A pay rise of just one pound over £100,000 plunges families into a tax trap.

Earners with two children whose salary ticked up to £100,001 in the 2024/25 tax year face their total take-home pay dropping from £86,192 to £68,558 – a cut of more than £17,500. This wouldn’t recover until the salary hits £140,000.

This is because when either parent passes this threshold, eligibility for the 30 hours of free childcare scheme is removed and access to £2,000 a year of tax-free childcare is denied. On top of this, the personal allowance begins to taper away.

Combining income tax and National Insurance (NI), £100,000 is also the start of the dreaded 62pc marginal tax rate – the amount taken by the Treasury on every extra pound.

The tax-free band diminishes by £1 for every £2 earned over £100,000. As a result, each extra pound above that threshold is taxed at a marginal rate of 60pc, or 62pc when including NI.

The Institute for Fiscal Studies, a think tank, has described this as an “insurmountable barrier” for parents.

The rise of six figures

A £100,000 salary is more achievable than ever. The number of taxpayers with six-figure incomes more than doubled between 2010 and 2022, going from 319,000 to 663,000 according to HMRC.

The median UK salary is also catching up. At just a quarter (£25,900) back in 2010, it is now well beyond a third of the way (£35,000).

And it isn’t what it used to be – with inflation it is equivalent to just £68,000 when the Conservatives came to power.

The soaring cost of living

The cost of living, however, has risen even faster since then, and a high salary does not necessarily equate to comfortable living.

Just over a quarter of employees (26pc) on £100,000 a year or more said they were living pay cheque to pay cheque, a survey by wealth manager RBC Brewin Dolphin found last year.

You could snap up a terraced house in London for just £450,000 in 2010. Such prized addresses are now 84pc more expensive, going for an average of £830,000 last year.

Buyers require bigger mortgages, and such monthly repayments are taking an ever larger bite out of budgets. With the base rate ratcheted up throughout 2022, monthly repayments for such homes hit £2,600 – assuming a 25-year term and 25pc deposit – a surge of 55pc in a year.

And assuming you graduated university with the now-standard £45,000 of student debt, the Government’s latest Plan 5 repayment schemes would tag on £560 to your bills for the best part of a decade.

Teetering on a tax cliff

So how much is left to meet all of these demands after taxes? In terms of take-home pay, there is good news. Back in the 2010/11 financial year, a person on £100,000 would be left with £65,300 after income tax and NI.

After the Chancellor’s cuts to NI, this nominal figure rises to £68,557 a year, or £5,713 a month, for 2024/25. Such people are, however, teetering on the precipice of a tax cliff.

This, at least, can be partially attributed to the last Labour government. Back in 2009, then-chancellor Allistair Darling introduced the personal allowance taper.

But Jeremy Hunt also played a part in increasing the burden on high earners by lowering the additional rate threshold from £150,000 to £125,140 in April 2023.

The number of taxpayers affected by the 45pc rate shot up from 555,000 to 862,000 overnight, while those earning £150,000 saw their income tax bill go up by almost £2,000.

This also halved the breathing space between those on £100,000 and the dreaded additional rate. Applying the Office for Budget Responsibility’s (OBR) long-term annual earnings growth estimate of 3.8pc, they would enter the top rate in just six years.

The impact of children

Throw a couple of kids into the mix, and the tax system becomes even more distortive. In the Budget, Mr Hunt did ease the burden on parents when it comes to the withdrawal of child benefit.

The High Income Child Benefit Charge (HICBC) used to take 1pc of a couple’s benefits away for every £100 either one earned over £50,000, leaving nothing after £60,000. For 2024/25, this threshold has been raised to £60,000 and the taper extended to £80,000.

For parents with two children, this means the marginal rate of tax within the HICBC falls from 63 to 53pc. This change has also had the effect of cementing the 62pc rate imposed on those between £100,000 and £125,140 as the worst possible.

The elimination of childcare benefits makes £100,001 the worst salary of all. Despite calls to address this glaring issue, the sudden removal of 30 hours of free childcare – worth an average of £13,600 for a parent of two 3- or 4-year-olds in England – remains in place.

No Tax-Free Childcare – where the Government tops up to £2,000 a year into the account from which childcare costs come out of – for two children adds £4,000 to the hit.