More than half of Britons earning £100,000 a year or more would consider turning down, postponing or restructuring a pay rise if it meant higher taxes, according to a survey by RBC Wealth Management of 750 people, defined as HENRYs – people with high incomes but no significant savings or investments.
55% of respondents said they would take such a step. Reasons include high housing and childcare costs, student loans and the costs of maintaining a certain lifestyle.
“The results highlight the financial reality of people who earn more than £100,000 a year but have limited savings and assets,“ RBC Wealth Management said. They point out that some respondents are worried that an increase in income will lead to a sharply higher tax burden until they have sufficient reserves for unforeseen expenses.
Frozen thresholds increase the tax burden
Tax thresholds in the UK have been frozen since April 2021. This means that with an increase in salary, more people fall into higher tax brackets, without the thresholds themselves changing in line with inflation.
Incomes over 50,270 British pounds are taxed at 40%, and over 125,140 British pounds - at 45%. However, between £100,000 and £125,140, an effective marginal rate of 60% is achieved as the tax-free personal allowance starts to be withdrawn.
The allowance is £12,570 and decreases by £1 for every £2 of income above the £100,000 threshold. It disappears completely at income of £125,140. So every additional pound in this range is taxed at 40%, while at the same time leading to a loss of some tax-free income.
Incomes are rising, but feelings of well-being are falling
71% of respondents are concerned about Chancellor John Healy's budget, particularly because of possible tax increases and the extension of the frozen thresholds. 79% say: “I earn more than ever, but I feel poorer“.
Financial vulnerability is also evident in unexpected expenses. 48% say they cannot cover a bill between £2,000 and £5,000 from their savings. They would rely on a loan, help from relatives, the sale of investments or an advance from their employer.
An additional burden on families is the loss of some social benefits. In England, reaching an income of £100,000 means losing the right to 30 hours of free childcare a week. For families with several young children, this change can cost tens of thousands of pounds a year.
Pension contributions reduce taxable income
46% of respondents to the survey are already putting more money into pension schemes to reduce their taxable income. Daniel Huff, director at RBC Wealth Management, warns that the £100,000 threshold doesn't just affect the personal tax-free allowance.
“This is also the point at which childcare support stops altogether, and for families with several young children it can cost tens of thousands of pounds a year. It's important for people to understand their marginal tax rate and how the different rules can affect them,“ says Huff.
According to Richard Evans, investment and pensions specialist at Fidelity, pension contributions can reduce adjusted net income below £100,000. For example, on an annual income of £110,000, an £8,000 contribution to a pension account could be increased to £10,000 with a £2,000 tax credit.
Other options include salary sacrifice schemes, including leasing a bike or electric car. The survey data shows that for a significant proportion of high-paid employees, a higher salary no longer automatically translates into higher disposable income.
Sources: dailymail.com