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Earning over £100,000 used to be a hallmark of success. Not so much any more.

These days, workers on six-figure salaries can be left thousands of pounds worse off thanks to our warped tax system.

Those earning between £100,000 and £125,140 face the highest effective tax rates in the country. This is because they lose their £12,570 personal allowance at a rate of £1 for every £2 earned, until it disappears entirely. Although on paper they pay 40pc tax, their effective tax rate is actually 60pc, meaning they only keep £400 of every £1,000.

On top of this, parents can be better off turning down a pay rise because they lose valuable childcare subsidies once they step over the £100,000 mark.

This year, almost 725,000 workers will fall into the 60pc tax trap, according to new figures from HM Revenue and Customs (HMRC), up from around 300,000 in 2018.

Sean McCann, of insurer NFU Mutual, who obtained the data through a freedom of information request, said: “Earning £100,000 used to be aspirational, but now it’s a sting in the tail.”

He continued: “When you add in National Insurance of 2pc, this means that only £38 of every £100 earned between these amounts ends up in the employee’s pocket.”

‘The allure of a higher salary diminishes’

The number of workers caught in the 60pc tax bracket is expected to soar to 850,000 by 2028-29, as wages rise while thresholds remain frozen – a phenomenon called fiscal drag.

In total, HMRC forecasts that 2.25 million workers will lose some or all of their personal allowance by 2028-29 because they exceed the £100,000 threshold.

John Clamp, of asset manager Bowmore Financial Planning, said “a huge cohort” of taxpayers were now taking home far less than expected.

“The tax burden on high earnings could have a broader and worrying impact on parts of the economy, as it is encouraging many taxpayers to reevaluate their work-life balance to reduce their tax bills.

“Leaving the tax trap unresolved means people will not see the reward of going the extra mile to earn a higher income. If HMRC takes 60p in every pound you earn above £100,000, the allure of working hard for a higher salary diminishes.”

The disappearance of childcare benefits makes the £100,000 cliff-edge even steeper.

Once a parent earns over £100,000, they no longer qualify for 30 hours a week of free childcare or tax-free childcare, worth up to £2,000 a year per child.

According to calculations by stockbroker AJ Bell, a £2,000 pay rise could cost a worker earning £99,000 almost £28,000 in tax and childcare subsidies.

Charlene Young, of investment platform AJ Bell, said: “What’s astonishing is how much their salary would need to increase to get to the same post-tax income and value of childcare support as before.

“The breadwinner’s salary would need to increase to around £156,000 before the family got back to the same total disposable income as when the breadwinner was earning £99,000.”

This distorted system means many high earners will do everything in their power to keep their salary below the six-figure mark.

Nimesh Shah, of accountancy firm Blick Rothenberg, said the main actions workers take to bring their income below the £100,000 threshold include saving more into their pension, donating to charity or buying additional holiday.

He added: “I’ve seen workers delaying bonuses so that income in the current tax year remains below the threshold, and even rejecting a salary increase because of the impact of the childcare threshold.”

Mr Clamp said some will go part-time or retire early to avoid the punitive tax rates and retain their childcare benefits.

“People who reach this kind of income are typically high performers – it’s not good for UK plc if they are cutting down on their work,” he said.

But not everyone can afford to take these actions. Cash-flow pressures may prevent a higher earner from increasing pension contributions or otherwise reducing their salary.

Average mortgage rates recently dropped below 5pc for the first time since the Liz Truss mini-budget but millions of borrowers remain stuck on higher repayments.

Inflation has risen to its highest level since January 2024, according to data from the Office for National Statistics, as households continue to face a cost of living squeeze.

The 60pc tax trap has existed since 2010 when Gordon Brown’s chancellor, Alistair Darling, first introduced the tapering of the personal allowance to raise revenue after the financial crisis. But since then, the £100,000 threshold has not moved. Had it risen with inflation, the threshold would now stand at £154,800, NFU Mutual said.

Freezing income tax thresholds is a way of raising revenue without changing rates – and so is often referred to as ‘taxation by stealth’. Rishi Sunak first froze thresholds as chancellor in 2022, promising the bands would rise with inflation in 2025-26. However, the next chancellor, Jeremy Hunt, extended the freeze until 2027-28.

In last year’s autumn budget, Rachel Reeves vowed to uprate the bands with inflation in April 2028. But with a ballooning £50bn hole to fill, there are fears she could break this promise in the next financial statement in order to balance the books.

A Treasury spokesman said: “This government inherited the previous government’s policy of frozen tax thresholds. At the Budget and the Spring Statement, the Chancellor announced that we would not extend that freeze.

“We are also protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of Income Tax, employee National Insurance or VAT. That’s the Plan for Change – protecting people’s incomes and putting money into people’s pockets.”