Andy Burnham, the newly elected Labour MP for Makerfield and likely next Prime Minister, has been urged to tackle a critical tax issue impacting British taxpayers. A recent report from Policy Exchange, supported by former Conservative Chancellor Sajid Javid, highlights how some individuals are facing marginal tax rates as high as 62% — far above the official top income tax rate of 45%.
The report explains that the gradual withdrawal of the personal income tax allowance combined with interactions between income tax and benefit withdrawals results in what is termed a “Manhattan Skyline” of marginal tax rates. Rather than smoothly increasing, rates jump up and down across income bands, creating severe financial penalties for earning more.
Specifically, those earning between £100,000 and £125,140 confront a marginal tax rate of 62%. This rate jumps to 71% when student loan repayments are factored in. Additionally, childcare subsidies are fully withdrawn once individuals hit £100,000, meaning a pay rise can paradoxically leave some worse off. In certain scenarios, marginal tax rates can even exceed 100%.
Families face similar challenges: those with children claiming Child Benefit see marginal tax rates rise to 49%, 54%, and 58% for incomes between £60,000 and £80,000 due to gradual benefit withdrawal. Even Universal Credit recipients experience sharp reductions as their income increases.
These high marginal tax rates discourage hard work, promotions, and risk-taking, ultimately harming economic productivity. The report also criticizes the complexity of the UK tax system and urges a complete overhaul of stamp duty.
Javid, in the report’s foreword, highlights that the UK’s tax burden has reached a 70-year peak and stresses the importance of reform for long-term economic growth. He asserts: “Talent, effort and ambition should always be rewarded. Our tax system is currently acting as a break on that – it’s time it got out of the way.”
As Burnham prepares to potentially lease the leadership reins of the Labour Party and the country, the pressure mounts for urgent tax reforms that promote fairness and economic vitality.