Thresholds play a crucial role in the tax system, providing exemptions for certain taxpayers, determining tax rates, defining eligibility for benefits, and streamlining administrative processes. However, they also present challenges for both taxpayers and administrators alike. Let’s delve into the key areas where these challenges arise.

The Tax Law Review Committee, a division of the Institute for Fiscal Studies (IFS), recently released a report titled “Thresholds in the Tax System,” highlighting the complexities surrounding major tax threshold rules and their impact on individuals and small businesses. The report proposes principles for designing future tax policies to address these difficulties.

Income Tax and Childcare:

  • Significant thresholds in income tax include the £100,000 income threshold, which influences personal allowance levels and child support, and the £60,000 income threshold (recently increased from £50,000) triggering the high-income child benefit charge.
  • The gradual withdrawal of the personal allowance above £100,000 results in an effective income tax rate of 60% on income between £100,000 and £125,140.
  • Adjustments to address spikes in marginal tax rates must weigh the government’s costs and taxpayer impacts, posing a challenging task.

Childcare support eligibility ceases at a threshold income of £100,000, affecting tax-free childcare and free nursery hours eligibility. The abrupt cessation of support without tapering poses financial challenges for affected families.

High-Income Child Benefit Charge:

  • Introduced in 2013, this charge claws back child benefit payments based on income levels.
  • The recent Budget adjusted the income range for clawback, starting at £60,000 and ending at £80,000, with varying effective tax rates based on the number of children.
  • A recommendation to apply a single taper rate, irrespective of the number of children, aims to simplify the charge’s administration.

VAT Registration:

  • The VAT registration threshold increased to £90,000 as of April 2024, previously frozen at £85,000 since April 2017.
  • Some businesses deliberately limit growth to avoid crossing the VAT threshold, resulting in a bunching effect.
  • Moving past the threshold entails increased administrative and compliance burdens, with VAT application required on all sales.


  • The paper also addresses complexities in pension allowance limits and uncertainties.
  • Exceeding contribution limits incurs tax charges, posing challenges for those in defined benefit schemes.
  • Recommendations suggest a broader review of pension taxation to support and encourage pension saving.

What does the report conclude regarding tax thresholds?

The report underscores the need for thoughtful reforms to address the challenges posed by tax thresholds, balancing administrative simplicity with fairness and efficiency. Patricia Mock, Sally Campbell, and Bill Dodwell authored the TLRC report, advocating for reforms in the tax system’s threshold mechanisms.

For information on how to make the most out of your business and money, contact us directly. For more information on the nature of tax thresholds, read on!

What are tax thresholds?

Tax thresholds serve as pivotal points within the tax system, delineating various aspects of taxation and financial eligibility. They are predefined income or expenditure levels that trigger specific tax treatments, exemptions, or benefits. These thresholds are established by governments to achieve various policy objectives, such as promoting fairness, incentivising certain behaviours, or simplifying tax administration.

One primary purpose of tax thresholds is to ensure that taxation is equitable and progressive. By exempting lower-income individuals or entities from taxation or providing them with tax credits or benefits, governments can reduce the tax burden on those who can least afford it. This approach aligns with principles of social justice and income redistribution, aiming to reduce economic disparities and promote societal well-being.

Additionally, tax thresholds are used to incentivise desirable behaviours or economic activities. For example, governments may offer tax deductions or credits for specific expenditures, such as education, healthcare, or renewable energy investments, to encourage individuals and businesses to engage in activities that contribute to broader social or economic goals.

Furthermore, tax thresholds play a crucial role in simplifying tax administration and compliance. By establishing clear cutoff points for taxation or eligibility criteria for benefits, governments can streamline the tax filing process for individuals and businesses, reducing administrative burdens and compliance costs.