This week’s budget promised an income tax giveaway next year worth nearly £3bn, as the chancellor raised thresholds for paying tax, while keeping the standard tax rates at 20%, 40% and 45% in England and Wales. Yet there are about 1 million people who face an effective 60% tax rate on their income, and after the budget, the problem, for some, got a bit worse.

The kinks in the tax system mean that if you are a mum or dad earning a good income of about £50,000 and then get a pay rise, you won’t see much of it come through in your pay packet. And if you are on a very sizeable income, such as £100,000, every pay rise you get until you earn more than £125,000 will be taxed at 60%. So what are these kinks in the tax system, and what, if anything, can you do about it?

The £50,000 tax trap for parents

Higher earners did well out of the budget, with the starting point for 40% higher-rate tax lifted to £50,000 from £46,350. That translates into an £860 cut in income tax, mitigated somewhat by higher national insurance contributions, taking the real gain to about £520 a year.

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But if you receive a pay rise that takes you above £50,000, and, crucially, you are a mother or father with children, then you face a tax charge of 1% of your child benefit for every £100 earned between £50,000 and £60,000.

If you have two children, then the total value of your child benefit is £1,790 a year. For every £1,000 you earn over the £50,000 you pay tax at 40% – or £400 – plus you lose 10% of your child benefit – £179. That is £579 in total, or an effective tax rate of 57.9%.

You can get an estimate of how much tax you would have to pay because of your child benefit on the gov.uk website.

The child benefit clawback is not new – it came into force in 2013. But as a result of budget changes, a parent on £49,999 pays a maximum 20% income tax, but their marginal rate effectively jumps to 57.9% when they tip over £50,000.

The standard advice for parents wanting to legally mitigate the reduction in child benefit is to increase their pension contributions. If you earn £51,000 and pay an extra £1,000 into your pension (for example, through your company’s AVC scheme), you will receive 40% tax relief on the money paid in, as well as reducing your income for child benefit purposes below the £50,000 threshold, thus avoiding any reduction in child benefit.

But the pension trick won’t work so well if it pushes your income below £50,000 – as from next April the tax relief will be only 20% on that portion of earnings between £46,350 and £50,000, not 40% as it is now.

The £100,000 high earner tax trap

Few of us are likely to feel much pity for those earning over £100,000 a year – although there may be more than you realise: HMRC figures show that 3.3% of employees in England earn £100,000 or more, rising to 6.4% in London – or 1 in 15 workers in the capital.

Once someone’s income goes above £100,000, the tax-free personal allowance is “tapered” away, at a rate of £1 for every additional £2 the person earns. So someone on £100,000 who receives a £1,000 pay rise must pay £400 in income tax, but will also lose £500 of their personal allowance. That extra £500 is taxed at 40%, costing the person an extra £200. So from the £1,000, they lose £600 in tax, an effective 60% tax rate.

For this financial year the £11,850 personal allowance means that the 60% rate effectively applies on incomes up to £123,700. But from next year, as the personal allowance rises to £12,500, the 60% rate will run until the person is earning more than £125,000.

Again, pension contributions will mitigate this tax, so if the person is on £105,000 a year and pays an additional £5,000 into their pension, they will get 40% tax relief, and their full personal allowance will be reinstated.

Paul Haywood-Schiefer, a tax specialist at accountants Blick Rothenberg, adds that apart from additional pension contributions, making a charitable donation also helps.

“For the charity, the donation is assumed to be made net of basic rate tax of 20%, which the charity can claim back from HMRC. For the individual, their basic rate tax band is increased by the value of the gross donation (the other tax bands stay the same, they will not shrink).”

The tax trap for the poor

A million people on low incomes are losing out on tax relief on their pension contributions, says the Low Incomes Tax Reform Group (LITRG) – and the increase in the personal allowance to £12,500, plus higher “auto-enrolment” contributions from April, will worsen the situation.

The problem affects low earners who are in “net-pay” pension schemes at their workplace (which is most people) rather than “relief at source” schemes.

Anne Fairpo of the LITRG says: “The higher personal allowance and increased contribution rate taken together mean that the minimum pension contribution for someone earning £12,500 in 2019-20 will now cost them £323.40 rather than £258.72 – because they will no longer get any tax relief to help make up their contribution amount. This is a difference of £64.68 – a week’s food shopping for a family, or a tank of petrol for the family car.

“This issue was already affecting more than 1 million people on the lowest incomes and, with the budget changes, will affect even more. There is no rationale for allowing this unfairness to continue. We urge the government to take action to ensure the lowest earners in net-pay arrangements also receive tax relief, so the benefits of auto-enrolment are not undermined.”

* This article was amended on 5 November 2018. An earlier version said “once someone’s income goes above £10,000, the tax-free personal allowance is “tapered” away, at a rate of £1 for every additional £2 the person earns”. We meant to say “above £100,000”. This has been corrected.