The Budget 2025 tax calculator

This online calculator calculates your tax on employment, self-employed or partnership income, and shows how it changes under a variety of Budget proposals. It charts the marginal and effective tax rate at all income levels, and shows where you fall on that chart.

The charts show that teachers, doctors and others earning fairly ordinary salaries can face marginal tax rates of more than 60%, and sometimes approaching 80%. We believe it’s inequitable and holds back growth. Rachel Reeves should commit to ending these anomalies.

This Government was elected on a platform of kickstarting economic growth. It has a large majority, and probably four years until the next election. It’s a rare chance for real pro-growth tax reform. That’s all the more necessary if we are going to see tax rises.

The tax calculator

You can view the calculator full screen here.

A quick guide:

When it starts up, the chart shows the current UK tax marginal rates at each income point. You can enter your income and see your tax result¹, and your position on the chart. You can use the “tax rules” dropdown to select:

• The 2023/24 rates.
• The Scottish current or 2023/24 rates.
• The IFS suggestion to increase income tax by 1p (it’s one of several options, not a proposal as such).
• The Resolution Foundation proposal to “switch” 2p from employee national insurance to income tax
• The Green Party proposal to abolish the national insurance upper earnings limit.
• The proposal to charge employer national insurance on partnership/LLP profits.

The app will then chart the marginal rate at each income point or (if you change the top left dropdown) give you a chart of effective rate at each income point, or net income vs gross income.

You can select a scenario in the “compare against” dropdown, and that scenario will be added to the chart (dashed red line).

The options

You can select options that demonstrate some of the features in our tax system that create anomalously high marginal tax rates:

• Once you increase “number of children” above zero, you see the effect of child benefit.² This increases the income of anyone with children under 16 (or under 20 if in approved education or training) but, once their income (or that of a cohabiting partner) hits £60k, the “high income child benefit charge” (HICBC) starts to claw child benefit back. It’s completely gone by £80k. That creates a very high marginal tax rate at £60k – 58% for someone with three children, and 67% if they also have a student loan.
• If you add “childcare subsidy” you can model the impact of the tax-free childcare scheme and the various Government free childcare hours schemes in England, Wales and Scotland.³ These schemes are generous – potentially worth £20k in some cases, but are completely unavailable if income exceeds £100k. That creates the very odd effect that someone using the schemes becomes worse off if their income exceeds £100k – a marginal rate well in excess of 100%.⁴
• The “student loan” option models the standard 9% student loan repayment rate.⁵
• The “marriage allowance” option deals with the small element of personal allowance sharing between married couples.
• And anyone earning £100k sees their tax-free personal allowance reduced, by £1 for every £2 of income above £100k. This isn’t an option – it happens automatically. It means the marginal rate at £100k is 62%, falling back to the “correct” amount of 47% once the personal allowance is completely gone at £125,140.

What the marginal rates mean

The “marginal tax rate” is the percentage of tax you’ll pay on the next pound you earn. It’s therefore critical because it impacts your incentive to earn that pound. It’s obvious that if 100% is taxed you’ll have a lower incentive than if 0% is taxed; and the.same is true for 70% vs 40%. We’ve written a fuller explanation of the precise meaning of “marginal tax rate”, and why it’s so important.

If you turn on all the “options” you’ll see a series of very high marginal rates across the UK, over 70% in some cases. The rates are even higher in Scotland (the red dashed line):

The marginal rate from the marriage allowance and the childcare subsidies is so high that it goes off the above chart. So it’s clearer if we plot net income vs gross income:

The marriage allowance is so small that it’s invisible in this chart (it’s a largely pointless piece of complication). The withdrawal of childcare subsidies, however, completely distorts the picture. When you earn £100k, you immediately lose these. So in this chart, with someone receiving £20k-worth of childcare subsidies, they are suddenly £20k worse off when they earn £100k, and their net income doesn’t recover to where it was until their gross income reaches £152k (or, in Scotland, £170k.⁶)

There are other minor effects which, for simplicity, our calculator does not cover.⁷

One issue not covered by the calculator is the high marginal rates impacting working people receiving benefits (other than child benefit). This improved significantly after the introduction of universal credit, but problems remain, particularly around the interaction with child benefit. Benefits are outside our expertise and therefore are not covered by this article or our calculator.

What are the real world effects?

Thanks to a recent Freedom of Information Act application by The Times, we can see that large numbers of people take steps to avoid the high marginal rates at £100k:

That pronounced “bump” at £100k represents approximately 32,000 taxpayers managing their income so it doesn’t go past £100k. There are two ways they can do this:

• Make additional pension contributions, e.g. through salary sacrifice. That reduces taxable income – but of course means that instead of receiving cash now, they will have a higher pension in the future. We can therefore expect this will be an attractive option to people nearing retirement, but unattractive for people at the start of their careers.
• Actually reducing their income – for example self-employed contractors turning away work, or employed staff working fewer hours (or even, in at least three cases we’ve heard of, refusing promotions).

Both outcomes reduce the tax people are paying. However the second outcome has an obvious wider effect – it’s reducing the supply of labour. The distribution shows roughly double the number of taxpayers at £100k relative to a smooth baseline – and in many cases these will be people who would have chosen to work and earn more.

We’ve heard anecdotally from managers unable to persuade staff to work more hours, or return to work full time – it’s a particular problem for hospital managers, as junior consultants are right at the £100k point.

But it’s important not to just focus on the impact on jobs that we might think are of particular societal importance.

It’s also problematic if an accountant or estate agent turns away work because of high marginal rates – it represents lost economic growth and lost tax revenue.⁸ It also makes people miserable.

What’s the solution?

These problems are getting worse over time, as fiscal drag takes more and more people into the thresholds that trigger these high marginal rates.

When Gordon Brown introduced the personal allowance taper in 2009, only 2% of taxpayers earned £100,000; by 2026/27 over 5% of taxpayers will. When George Osborne introduced child benefit clawback a year later, only 8% of taxpayers earned £50,000; by 2026/27 over 10% of taxpayers will earn £60,000.⁹

This creates a double problem. First, the economic distortions created by the high marginal rates start to impact into mainstream occupations (doctors, teachers). Second, the revenues raised by the marginal rates are now so great that they become hard to repeal.

Ending the high marginal rates in one Budget is, therefore, not realistic – particularly in the current fiscal environment. The cost of making child benefit, the personal allowance, and childcare subsidies universal, would be expensive (somewhere between £5-10bn, depending on your assumptions). The obvious way of funding this – increasing income tax on high earners, appears to have been ruled out.

We would suggest four modest steps:

• An acknowledgment that the top marginal rates are damagingly high, and that the Government will take steps to reduce them when economic circumstances permit.
• Some immediate easing of the worst effects, at minimal cost to the Exchequer, for example by smoothing out the personal allowance taper over a longer stretch of income, therefore reducing the top marginal rate, and slightly increasing the additional rate so that the measure is revenue-neutral overall.
• A commitment to uprate the thresholds for clawback of child benefit, personal allowance and childcare subsidy in line with earnings growth or inflation.
• A commitment that no steps will be taken to make the high marginal rates worse, or create new ones.
• A new rule that Budgets will be accompanied by an OBR scoring of the highest income tax marginal rates before and after the Budget.

There’s a coherent political case for people on high incomes paying higher tax (whether we agree with it or not). There is no coherent case for people earning £60k, or £100k, to pay a higher marginal rate than someone earning £1m. It’s inequitable and economically damaging. Ms Reeves should call time on high marginal rates.

Code

The code for the calculator is available here. If you want to experiment with different rates you can download all the files and run “index.html” locally. You can then edit “UK_marginal_tax_datasets.json” and add different scenarios.

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