The £100k tax cliff edge is punishing ambition
The £100,000 income cliff edge has become one of the most punitive and distortionary features of the UK tax landscape, says Michael Healy
The government has made clear that it wants to boost economic growth, strengthen UK capital markets, and encourage greater participation in investing. These are ambitions we strongly support. But one part of the current tax system is working directly against them.
The £100,000 income cliff edge has become one of the most punitive and distortionary features of the UK tax landscape. It suppresses aspiration, distorts career decisions, and limits the ability of a key demographic to invest for the long term.
At IG, we recently surveyed more than 1,000 individuals earning between £90,000 and £125,000 – the so-called ‘HENRY’ cohort: High Earners, Not Rich Yet. These are typically mid-career professionals with growing earnings, mortgages, young families, and strong long-term savings potential. In short, they are exactly the group policymakers should want participating actively in UK capital markets.
Yet our research suggests the system is holding them back.
Four in five respondents told us they have taken steps to avoid crossing the £100,000 threshold in the past. Nearly a third have reduced their hours. More than a quarter have turned down a promotion. Others have refused bonuses or pay rises.
Behavioural distortion
This is not tax planning at the margins, it is widespread behavioural distortion.
Why? Because once earnings cross £100,000, the personal allowance begins to taper away, creating an effective marginal tax rate of up to 60 per cent. For families with young children, the situation is even more severe: eligibility for additional free childcare hours is withdrawn entirely once one parent’s adjusted income exceeds the threshold.
The combined effect can be startling. Our analysis shows that a household with two nursery-age children could be more than £13,000 worse off next tax year by accepting a standard pay rise that pushes them beyond the limit. When earning more leaves you materially worse off, something is clearly wrong.
This matters not only for individual households, but for the broader economy.
HENRYs, and those approaching this salary range, are not the ultra-wealthy. They are middle to higher earners building careers in sectors as diverse as healthcare, education, or IT. They are precisely the households with both the capacity and the inclination to invest over the long term – in pensions, ISAs and UK-listed companies. If the government is serious about increasing domestic participation in UK equities, this group should be central to that strategy.
Instead, frozen thresholds and sharp cut-offs are reducing disposable income, undermining confidence, and constraining the ability to deploy capital. Nearly half of those we surveyed said they cannot invest enough to build future wealth due to tax and financial pressures. Among those with nursery-age children, the figure rises dramatically.
Frozen thresholds and sharp cut-offs are reducing disposable income, undermining confidence, and constraining the ability to deploy capital
The solution does not require radical tax reform. It requires common sense. First, key thresholds should move with inflation. The £100,000 childcare eligibility limit has been frozen since 2013. Uprating it would smooth progression and remove the sudden penalty for modest pay increases. The same principle should apply to the personal allowance taper, reducing extreme marginal rates that distort behaviour.
Second, policymakers should consider targeted measures to encourage long-term investment in UK equities among middle and higher earners. If we want deeper domestic capital markets, we must ensure that those with the means to invest are not financially squeezed at precisely the point their earnings peak.
Finally, flexibility mechanisms such as pension salary sacrifice – which many families use to manage adjusted income and maintain childcare eligibility – should be preserved rather than curtailed. Removing these tools would only intensify the cliff-edge effect.
None of this is about shielding high earners from contributing their fair share. It is about designing a system that rewards ambition rather than penalising it, and supports the desire to have a family while also growing wealth.
Economic growth depends not just on corporate policy or institutional capital, but on household participation. If we want more people investing in Britain’s future, we must ensure the tax system does not discourage them from progressing in their careers or deploying their savings.
The £100,000 cliff edge may seem like the last thing a cash-strapped government should care about. In practice, it is shaping behaviour across the middle class and hamstringing growth. Reforming it would send a powerful signal that ambition, work, and long-term investment are valued.
Michael Healy is UK & Ireland Managing Director at IG Group