David Macdonald, Managing Partner at UK200Group member firm The Martlet Partnership, has recently drawn attention to one of the more extreme quirks of the UK tax system, after being quoted in The Sunday Times on the issue of high marginal tax rates.
David’s example demonstrates how the interaction between income tax thresholds and allowances can, in very specific circumstances, lead to outcomes that appear entirely disproportionate to the income involved.
A real-world example
As David explained, consider two taxpayers with almost identical earnings:
“Taxpayer X has a salary of £50,270 and interest income of £1,000. Income tax liability is £7,540.
Taxpayer Y has a salary of £50,270 and interest income of £1,001. The tax liability is then £7,740.”
In this scenario, an additional £1 of income results in £200 more tax being paid, creating what is, in effect, a marginal tax rate of 20,000%.
The following week’s issue of The Sunday Times then went on to show further examples of extreme marginal rates – one reader applied the same principle to a taxpayer earning £125,140, the higher-rate limit, whose savings income rises from £500 to £501. The reader points out that the £500 tax-free savings limit is lost, and £500 is therefore taxed at the 60% marginal rate, which applies between £100,000 and £125,140, while the extra £1 is taxed at 45%, meaning total additional tax of £300,45, or a 30,045% marginal rate.
David adds that the marginal rate can be easily negated by making Gift Aid donations and carrying them back to the prior year.
Why does this happen?
This kind of distortion typically occurs when multiple elements of the tax system interact at the same point. In this case, a relatively small increase in income pushes the taxpayer over a threshold at which reliefs or allowances begin to be reduced or removed entirely.
The result is that the additional income is not just taxed but also triggers the loss of tax‑free or lower‑taxed income elsewhere. When viewed purely in marginal terms, this can make the system feel arbitrary, even though the underlying rules were not designed with such outcomes in mind.
More common than many realise
Although a 20,000% marginal rate is extreme, high marginal tax rates are not unusual in certain income bands. Similar effects can be seen where income tax interacts with:
- The withdrawal of the personal allowance
- The high-income child benefit charge
- Student loan repayments
- The loss of childcare support or other means‑tested benefits
Individually, each policy may appear reasonable. Combined, they can create effective tax rates far higher than most people expect, often catching taxpayers by surprise.
Why this matters
Examples like this matter because they highlight how complexity in the tax system can undermine confidence and trust. For individuals and business owners alike, understanding the real impact of earning more should not require specialist modelling or hindsight.
As advisers, UK200Group members regularly help clients navigate these issues – not only to ensure compliance, but to support informed decision‑making around pay, savings, dividends and long‑term planning.
A case for clearer policy thinking
David’s example has resonated precisely because it is simple, tangible and unsettling. It reinforces the argument that policymakers need to consider not just headline tax rates, but the combined impact of thresholds, tapers and withdrawals on real people’s finances.
Quotes above have been taken from The Sunday Times.