The OECD is right about the £100k dead zone where work doesn’t pay
A household with two young children could be more than £13,000 worse off next year for accepting a routine pay rise that pushes them over the £100,000 threshold, says Michael Healy
The OECD delivered a blunt message to the UK last week: simplify the tax system or accept weaker growth.
That should not be ignored, because the issue now goes far beyond complexity on paper. Over time, the UK has built a system of thresholds, tapers and reliefs that interact in ways few intended and even fewer fully understand, creating distortions that are feeding directly into decisions about work, progression and investment.
Nowhere is this more visible than at £100,000, where the system shifts abruptly from progressive to punitive. Cross that income threshold and the personal allowance begins to disappear, while for many families childcare support falls away entirely, producing effective marginal tax rates of 60 per cent (62 per cent factoring in NI contributions).
The OECD has long warned that such ‘kinks’ discourage people from increasing their earnings. And politicians are rightfully clocking on. Education secretary Bridget Phillipson has recently acknowledged the problem, confirming that the £100,000 childcare cliff edge is under review as the system has become too complex for families to navigate.
At IG, our research into those earning between £90,000 and £125,000 – the High Earners, Nor Rich (HENRY) cohort – shows how deeply these distortions are biting. These are not the ultra-wealthy, but mid-career professionals with rising incomes, young families, and the capacity to invest – precisely the group policymakers should rely on to drive long-term growth.
Instead, many are holding back, with four in five (82 per cent) saying they have taken steps to stay below £100,000, from cutting back hours to turning down opportunities that would otherwise increase their income. That is a rational response to a system where, at a certain point, getting ahead no longer pays.
The consequences extend beyond earnings, as nearly half (48 per cent) of those surveyed say they are unable to invest enough to build long-term wealth, rising sharply among households with nursery-age children.
For a government focused on boosting participation in UK capital markets, that should be a concern. These households represent a crucial pipeline of domestic investment, yet the system is limiting their ability – and, increasingly, their willingness – to deploy capital.
Clear distortion
The distortion is clear in practice. Our analysis shows a household with two young children could be more than £13,000 worse off next year for accepting a routine pay rise that pushes them over the threshold – the kind of “dead zone” the OECD has warned about, where extra work simply doesn’t pay.
Much of this has been exacerbated by frozen thresholds, which have quietly expanded the reach of the problem. If the £100,000 childcare limit had kept pace with inflation since 2013 it would now sit closer to £135,000, while the personal allowance taper would begin nearer £156,000.
This is fiscal drag at its most damaging, pulling more people into a system that punishes progression. The fix is not complicated. Letting thresholds rise with inflation would take some of the pressure out of the system, while easing the taper would ensure that earning more actually leaves people better off.
Beyond that, there is a clear opportunity to align tax policy with growth ambitions. A dedicated UK Equities Investment Scheme – offering income tax relief on UK-listed shares held in ISAs – could unlock capital from middle and higher earners, with higher-rate taxpayers receiving up to £8,000 in annual relief while supporting domestic capital formation.
At the same time, policymakers should protect the tools households already use to navigate the system. The planned £2,000 cap on NIC-free pension salary sacrifice contributions risks eroding a vital mechanism families rely on to manage income and avoid cliff-edge losses, and should be reconsidered.
The OECD is right to highlight that the structure of the UK tax system is now acting as a constraint on growth. When the incentives within that system begin to influence whether people take on more work, pursue advancement or invest for the future, the effects extend well beyond individual households.
Michael Healy is UK & Ireland managing director at IG