High earners are being increasingly squeezed as fiscal drag, a cliff edge for childcare support and a high tax burden bite, with a growing group of professionals described as HENRYs — high earner, not rich yet.
HENRYs are relatively young, in their late 20s or 30s, and likely have a job in London, but will struggle to afford a nice home in a desirable part of the capital on a single salary. They may have children but will struggle to afford private school fees and childcare.
A quirk of the tax system means those earning over £100,000 start paying a marginal tax rate of 60%, because the tax-free personal allowance tapers away at £1 for every £2 earned above £100,000 until it is entirely removed at £125,140. This can reach as high as 69% for those also paying off student loans. More high earners are being pushed into this trap as incomes rise while the £100,000 threshold remains unchanged and tax thresholds have not risen since April 2021.
Parents of children aged nine months to four years old get 30 free hours of childcare a week for 38 weeks of the year, but lose access if they earn a penny over £100,000. Tax-free childcare, worth £2,000 a year per child, is also removed at that threshold, although the universal 15 free hours for three and four year olds is retained. Child Benefit starts to be lost once individual income is over £60,000 and is lost entirely at £80,000.
For two-parent households with two nursery-aged children and total income of £120,000, the difference can be as much as £9,800 a year because of the removal of Child Benefit and funded childcare hours, according to modelling by investment firm IG. Where a primary earner brings in around £110,000 and the second person earns £10,575, the household loses £2,300 in Child Benefit and £7,500 in funded childcare support a year. By comparison, two mid-earners on £60,000 each would not lose Child Benefit, tax-free childcare or face the £100,000 tax trap.
Malvee Vaja, a financial planner at Rathbones, said one way to escape the 60% tax trap is to reduce taxable income through pension contributions. "If you're someone whose bonus plus salary takes them into that tax trap area, a really easy way to move yourself out again is by making a pension contribution," she said. For example, someone earning £110,000 could put an extra £10,000 into their pension, reducing income to £100,000. Vaja added that many high-earning clients do not know how to maximise their tax-free allowances, such as pensions and ISAs.