MPs’ salaries are set to rise toward £110,000 in the coming years, placing them squarely within one of the UK tax system’s most notorious quirks: the £100,000 income threshold where effective marginal tax rates can hit 60 per cent.

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But there is a catch. Many MPs will avoid the trap entirely. Because their generous defined-benefit pension contributions are deducted before tax, an MP earning £110,000 will likely see their taxable income fall back below the threshold. The system effectively shields them from a cliff edge that millions of private-sector workers cannot escape so easily.

For professionals earning between £100,000 and £125,140, the loss of the personal allowance creates a 60 per cent effective tax rate. For parents of young children, the hit is even harsher as they lose tax-free childcare and free hours.

Recent IG research reveals how distorted behaviour has become. We found that four in five people earning £90,000- £125,000 have actively taken steps to stay below the £100,000 threshold. Nearly a third have reduced their working hours, and 28 per cent have turned down promotions. While "front-loading" a pension is an option, many feel the extra stress and responsibility of a senior role simply isn't worth it when the financial benefit is invisible in their day-to-day lives. Our modelling shows a household with two nursery-age children could be £13,000 worse off simply by accepting a pay rise.

HENRYs - mid-career professionals with long-term wealth-building potential - should be at the vanguard of the UK’s retail investing revolution. Yet, our research shows they feel financially pressured. Almost half say they cannot invest enough to build future wealth; among households with nursery-age children, that figure rises to 92 per cent.

If this demographic - the engine of the professional economy - no longer feels incentivised to stay "hungry" or invest aggressively, the consequences for our already stagnant national growth are severe.

The core problem is fiscal drag. If the £100,000 limit for free childcare had kept pace with inflation since 2013, it would be closer to £135,000. Similarly, if the personal allowance taper were uprated, it would begin at £156,000 today. Indexing these thresholds annually would remove the extreme 60% marginal rates and restore the disposable income necessary for long-term investment.

Beyond threshold reform, the government should introduce a dedicated UK Equities Investment Scheme. By providing income tax relief on UK-listed shares held in ISAs, higher-rate taxpayers could receive relief of up to £8,000 annually. This would encourage middle earners to build personal wealth while simultaneously boosting UK capital formation.

Finally, we must protect the tools workers use to navigate this system. The planned £2,000 cap on NIC-free pension salary sacrifice contributions, slated for 2029, should be reversed. This cap would erode a vital mechanism families use to manage their adjusted income and avoid cliff-edge losses.

If the £100,000 limit is distorting decisions for millions, policymakers should not be insulated from it. Fixing this trap would do more than support families; it would restore ambition and unlock vital investment for the UK economy.

Michael Healy is UK & Ireland Managing Director at IG.

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