- HENRYs (High Earners Not Rich Yet) are younger higher earners – possibly in their 40s and making around £100,000 or more.
- They are a significant target for income tax and could be hit with another freeze in the Budget.
- They also face threats to investments, pensions, council tax and even any potential inheritance.
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“HENRYs already face significant income tax burdens, and those earning more than £100,000 face an eye-watering tax rate of 60%. However, as speculation grows around potential tax changes in the Budget, the risks rise that HENRYs could face sizeable extra costs.
We already know that income tax is frozen until 2028, but there’s every chance that freeze could be extended. Meanwhile, there’s a risk that their efforts to build investments and pensions could be thwarted by additional tax. Then there are questions around inheritance tax which could mean HENRYs have to wait longer for gifts from family members. Plus, there’s likely to be more bad news on council tax.
Income tax
Income tax already falls most heavily on higher earners. Earning more than £97,900 puts HENRYs in the top 5% of earners and this group pays almost half of all income tax (49%).
The portion of their income that falls between £100,000 and £125,140 is taxed particularly heavily. For every £2 you earn over £100,000 you lose £1 of your personal allowance. By the time you earn £125,140 you’ve lost the lot, so on that chunk of your salary you effectively pay 60% tax. To add insult to injury, at the £100,000 threshold, HENRYs with young children lose government support for childcare. Once you’ve breached £125,140 you pay 45% on the extra.
There are already some horrible tax traps lying in wait for higher earners, because the £100,000 threshold hasn’t moved since it was introduced in 2010, so every pay rise risks pushing higher earners over it. The additional rate tax threshold, meanwhile, was cut from £150,000 to £125,140 in April 2023 and remains frozen, so the number of people paying additional rate tax has more than doubled since 2022. The freeze is already in place until 2028, but the government hasn’t ruled out an extension. It means even more people will be pushed into paying 45%.
In this environment, it will be key for HENRYs to do what they can to keep their income tax bills down. In terms of earnings, they should check if their employer operates a salary sacrifice scheme, where they give up a portion of their salary, and spend it on certain things free of tax – including pensions. If not, they can still pay into a SIPP and receive tax relief at their highest marginal rate. If they’re making income from savings interest, they can use a cash ISA to protect as much as possible from tax.
Tax on pensions
HENRYs may be worried about talk of potential changes to the tax relief on pensions, with some kind of flat rate put in place. If the flat rate was set higher than 20%, it could potentially be good news for basic rate taxpayers, but it would be bad news for higher and additional rate taxpayers – including HENRYs. These are the years when they will have been hoping their income gave them the freedom to plough more into their pension, so a cut in tax relief at this stage would be particularly galling.
For anyone in this position, there is still a window of opportunity. If you’re worried about potential reductions in pension tax relief, then if and you have some spare cash, you could consider making the most of the system (as it currently stands) with an extra contribution to your SIPP. The annual allowance usually allows people to benefit on tax relief on contributions – up to whichever is lowest of their annual earnings or £60,000 every year.
Tax on investments
HENRYs might not have been able to build up significant investments, but thanks to changes in allowances, even typical investors face the threat of tax – including capital gains tax and dividend tax when you invest outside an ISA or a pension. The allowances of both have been cut so much in recent years that there’s a risk any more changes expose even those with modest investments to these taxes.
If this is a concern, it makes sense to take advantage of stocks and shares ISAs and pension allowances. Money in both is protected from tax, helping you build more effectively for the future.
Council tax
HENRYs also face higher council tax bills. They may not have much equity in the property, but they’re likely to have bought or rented larger and more expensive properties, in nicer parts of town, so fall into higher council tax brackets. Council tax was hiked 5% in the current tax year, and given that councils continue to wrestle with their finances, the Budget may well announce more of the same in the coming year
There’s also the chance that the government sees council tax as a potential fundraising option, focused on the HENRYs. When George Osborne was Chancellor, he considered creating new levels of council tax on pricier properties, and the current government could choose to explore it again. They might also consider some sort of surcharge on more expensive properties – or even a more wide-ranging reform that leant more heavily on pricier homes. HENRYs would be in the frame for even higher tax bills.
Tax on inheritance
There have been rumours of inheritance tax tweaks that could halt an awful lot of gifting. The government is thought to be exploring the possibility of a cap on gifts that people can make during their lifetime. It’s also said to be looking at changes to taper relief, which would mean a bigger tax bill for people who left large gifts and then died within seven years.
Questions around the future of inheritance tax could be worrying news for HENRYs, hoping that an inheritance could close the gaps in their finances. It might encourage anyone planning to leave them money to do so sooner rather than later, to take advantage of gifting allowances or get the clock ticking on the seven years it takes for a larger gift to leave their estate. However, if there is a limit to lifetime gifting, it could encourage people to sit on their legacy for life, so HENRYs have no opportunity to receive lump sums when they most need them.
Anyone who was relying on an inheritance may need to consider what would happen if they didn’t get one. It makes sense to plan for covering the essentials at any stage in life, so that an inheritance is only ever for the nice-to-haves or for lifestyle changes. It might mean they need to think about everything from how much they want to stretch themselves to buy a home, to whether they’re putting enough into a pension or SIPP to meet their needs.”
