Why the OBR Is Examining High Marginal Tax Rates

The Office for Budget Responsibility (OBR) is reviewing high marginal tax rates because the UK’s rising tax burden, frozen thresholds, and cliff‑edge rules are now creating measurable risks to labour supply, economic behaviour, and fiscal forecasting.

Tax Burden and Systemic Distortions

Tax-to-GDP Ratio

• Forecast to reach 38.5% by 2030/31.
• Higher tax levels increase the chance that marginal rates distort decisions to work, save, or invest.

Behavioural Sensitivity

• Capital taxes fall on a narrow, high‑income base and respond strongly to policy changes.
• Threshold freezes make revenues highly sensitive to inflation and nominal earnings growth.

UK Marginal Rates in an International Context

OBR’s Initial View

• The UK’s overall tax burden is not unusually high among advanced economies.
• Evidence suggests UK marginal tax rates may exceed the OECD average, which is more relevant for labour incentives.

Planned Research

• The OBR will publish a comparative analysis of UK marginal tax rates in the 2026 Fiscal Risks and Sustainability Report.

The £100,000 Threshold and Personal Allowance Taper

Effective Marginal Rates

When adjusted net income exceeds £100,000:

• Personal allowance is withdrawn over the next £25,140 of income.
• Creates an effective 60% marginal income tax rate (67.5% in Scotland).
• Adding 2% NI and 9% student loan repayment pushes marginal rates above 70% for many.

Loss of Childcare Support

Crossing £100,000 also triggers:

• Loss of tax‑free childcare (up to £2,000 per child).
• Loss of free childcare entitlement in England.

Impact on Disposable Income (IFS Examples)

• A parent with two children using average English childcare loses £14,500 of disposable income when earnings cross £100,000.
• Disposable income does not recover until earnings reach £134,500.
• In London, the loss can reach £20,000, with recovery only at £144,500.

Number of People Affected

HMRC Projections (Thousands)

• £90k–£100k: 482 → 541 (2025/26 to 2028/29)
• £100k–£110k: 355 → 413
• £100k–£120k: 295 → 309
• £120k+: 1,300 → 1,570
• Total above £100k: 1.95m → 2.29m

Revenue Concentration

• Around 1 in every 8 pounds of income tax comes from those earning £100k–£150k.
• This is almost equal to the contribution from those earning £200k–£500k.

Why High Marginal Rates Matter for the Public Finances

Forecasting Risk

High marginal rates increase the likelihood that taxpayers:

• Reduce working hours
• Decline promotions
• Increase pension contributions
• Restructure income

These behaviours make revenues harder to predict.

Growth and Productivity Risk

Distortions can reduce:

• Labour supply
• Career progression
• Investment in skills
• Entrepreneurship

Fairness and System Coherence

Cliff‑edges undermine confidence in the tax system and create outcomes where higher earners can be worse off than lower earners.

Why Reform Is Unlikely

• Fixing the taper would require significant revenue replacement.
• Alternatively, it would require a major restructuring of income tax, likely involving higher rates or lower thresholds elsewhere.
• Fiscal constraints make reform politically unattractive despite OBR warnings.

Historical Background

Origin of the £100,000 Taper

• Introduced in the 2009 Budget to keep the additional‑rate threshold high while adding a 50% top rate.
• Now a leading example of how inflation and frozen thresholds create severe marginal‑rate distortions.

FAQs

What is the marginal tax rate between £100,000 and £125,140?

Up to 60% (67.5% in Scotland), before NI and student loan repayments.

Why does disposable income fall when earnings exceed £100,000?

Because taxpayers lose the personal allowance, tax‑free childcare, and free childcare entitlement, which can outweigh the additional gross income.

How many people are affected by the £100,000 taper?

Around 2 million taxpayers already earn above £100,000, rising to 2.29 million by 2028/29.

Why is the OBR concerned now?

Because frozen thresholds, rising wages, and behavioural sensitivity make revenues more volatile and the tax system more distortionary.

Is reform expected?

Reform is unlikely due to the high fiscal cost and the need for broader structural changes to income tax.