How to know if you are paying 60pc, 70pc or even 100pc tax

Basic-rate taxpayers face losing more than two thirds of their incomes to hidden taxes – and the rates are only going to get worse as bands stay frozen until 2027-28.

There are three rates of income tax in Britain: 

• Basic, at 20pc
• Higher, at 40pc of earnings over £50,270
• Additional, at 45pc, which kicks in above £125,140 (lowered from £150,000 in Jeremy Hunt’s Autumn Statement)

But even at the lower end of the pay scale, some earners attract a rate of tax that is far higher than 45p in the pound.

When earnings rise above one of several thresholds, taxpayers forfeit 60pc, 70pc, or even more than 100pc on a proportion of their income, as the chart below shows.

These huge marginal rates of tax are caused by special tax benefits and allowances that have been introduced under various governments and then withdrawn or capped under others.

Child benefit, for example, is entirely “taxed away” if you earn over £60,000 and starts to be withdrawn from £50,000, following the introduction of a tax charge for higher earners in 2013. Between those two levels of income, parents suffer a charge equal to 100pc of their entitlement.

A family with three children faces paying tax at an effective rate of around 69pc on earnings between £50,000 and £60,000 because of the effect of the tax charge.

Isaac Delestre of the Institute for Fiscal Studies think tank, said these spikes in marginal income tax rates are “very unwelcome” features of the tax system – “causing significant distortions to the earnings and savings behaviour of individuals in ways that make our economy less efficient.”

He added: “Regrettably, these spikes have not only been allowed to persist but, because thresholds are frozen in cash terms, each year impact an ever-greater share of the population.”

This is because the £50,000 cap has not risen with inflation and has remained frozen, whereas higher rate tax now starts to be levied on earnings above £50,270.

In another example of hidden marginal tax rates, those earning £100,000 a year face paying tax, not at 40pc as you would expect, but at 60pc on a band of their earnings, as this is the point at which the Government begins to withdraw the £12,570 tax-free personal allowance.

For every £1 earned over £100,000, the state reduces the allowance by 50p. The result is that each additional £1 of income effectively incurs 60p of income tax, as the chart shows. Once National Insurance is factored in, the true rate is even higher.

Earnings of more than £125,140 are then taxed at the additional rate 45pc, and the distorting effect of the personal allowance clawback is lost.

The vertical line which goes off of the chart illustrates the point at which the marriage allowance, worth £252 per couple (as long as one of you earns less than the £12,570-a-year personal allowance and the other pays 20pc), is lost, as the earner’s income enters the higher 40pc bracket. In effect £1 extra earned costs the earner £252.

Graduates also face losing more of their incomes to tax, if you count student loan repayments as de facto levies. They represent an effective 9pc in additional income tax.