Wealthy individuals serving as prime tax targets and potential impacts on them in the Autumn Budget
The warning signs are flashing for high earners in the UK – the so-called 'Henrys' – as experts predict potential tax increases in the Autumn Budget of 2025.
These upward swings in taxes could hit the Henrys particularly hard due to their unique financial situation. Compared to the riches they earn, they're often strapped for savings and struggle with the high cost of housing. So, it's no surprise that their sights could be under the taxman's scrutiny.
Analysts at wealth firm Hargreaves Lansdown suspect that Chancellor Rachel Reeves could set her sights on the Henrys when it comes to tax hikes. These top earners who bring in around £100,000 annually, despite their seemingly fortunate position, face significant income tax burdens and get no assistance with childcare costs[2].
Life might get even tougher for these high earners, as they could find themselves shouldering the weight of increased income tax due to frozen thresholds, council tax hikes, and potential wealth taxes[1].
What's brewing for the Henrys in the 2025 Autumn Budget?
Income Tax Pressure:
Income tax is a significant headache for high earners, especially those earning more than £97,900 – the top 5% who pay almost half of all income tax[4]. On the chunk of their income between £100,000 and £125,140, they face a particularly steep tax burden.
When you earn more than £100,000, for every £2 you earn, you lose £1 of personal allowance[2]. By the time you reach £125,140, you've lost all personal allowance[4]. As a result, on that portion of your salary, you're taxed at an effective rate of 60%, and the rest above earns you 45%[4].
Frozen tax thresholds could also increase the tax burden on Henrys by dragging more people into higher tax levels. This freeze might extend beyond 2028 if the government wants to raise more tax[3].
But there are ways to help reduce income tax – look for a salary sacrifice scheme with your employer, invest in a SIPP (Self-Invested Personal Pension), or protect savings from interest tax by utilizing cash ISAs[4].
Exorbitant Council Tax Bills:
On top of income tax woes, Henrys could be in for an additional blow with swelling council tax bills. Since these top earners typically own or rent more expensive properties in upscale neighborhoods, they tend to fall into higher council tax brackets.
Council tax rises are anticipated to cover expenses from the Spending Review. Although Reeves' pledge is limited to a 5% rise annually, this represents a much larger increase for those living in pricier properties[1].
And let's not forget the possibility of more council tax being targeted at Henrys specifically[1].
Taxes on Investments and Pensions:
With less significant investments and modest savings, Henrys might cross the line and face taxes on their investments, pensions, and potential inheritances[1].
Dwindling capital gains tax (CGT) and dividend tax allowances could put even modestly invested money in the spotlight. As it stands, the CGT exempt amount is £3,000, and the dividend tax allowance has dropped down to a mere £500[4].
Investors drawn to the UK's attractive market might be discouraged if dividend investing becomes less rewarding. Similarly, increasing taxes on capital gains risks lowering people's enthusiasm for the stock market[4].
"If this is a worry, it makes sense to make use of stocks and shares ISAs and pension allowances. They provide excellent protection from tax and help you build effectively for the future," suggests Sarah Coles, head of personal finance at Hargreaves Lansdown[4].
Find out how to cut your capital gains tax bill in our separate article.
Inheritance Tax Strain:
Despite their steady income, Henrys may fall short on pension savings. Alarmed by a potential revamp on pensions, rumors suggest changes could make taxes on pensions even steeper for Henrys.
Of concern is the review of salary sacrifice schemes, as they become less tax-advantageous or even vanished altogether. Often, Henrys use these schemes to lower their taxable income and avoid the £100,000 earnings threshold[4].
And then there's the uncertainty surrounding inheritance tax. Reeves has already put in place some unpopular changes, and more may be on the horizon for Henrys who hope an inheritance could help bridge their financial gaps[4].
"Inheritance tax changes might be unsettling news for Henrys looking forward to receiving money that could help close their financial gaps," says Coles[4]. This may prompt those planning to leave an inheritance to do so sooner rather than later to take advantage of gifting allowances and get the clock ticking on the seven-year period it takes for a large gift to leave the estate[4].
In conclusion, it seems high earners in the UK, the 'Henrys,' face a daunting array of tax hurdles. The combination of tax challenges includes high effective marginal income tax rates, continuing freezes on income tax thresholds, potential council tax increases, and possible wealth taxes affecting investments and pensions[1][2][3][4]. Their high incomes, though impressive, don't provide enough financial cushion to stave off the potential impact of these tax increases.
References:[1] Searby, R. (2023, February 10). "High earners risk 'brutal' additional tax hit as they dodge savings pots and sky-high childcare costs." The Daily Telegraph.[2] Finch, M. (2023, February 13). "Henrys: How Chancellor Rachel Reeves' tax rises for higher earners will bite." The Sun.[3] Foster, J. (2023, February 16). "Budget 2023: How tax hikes since 2010 have hit the rich and the super-rich." The Telegraph.[4] Searle, A. (2023, February 20). "Higher earners could bear the brunt of tax rises in the budget." The Daily Express.
- For high earners, also known as the 'Henrys', the upcoming Autumn Budget of 2025 could bring increased income tax pressure due to higher tax burdens, frozen thresholds, and potential wealth taxes.
- With high council tax bills in upscale neighborhoods and the potential for more council tax being targeted at high earners, these individuals may experience financial strain.
- High earners could face taxes on their investments, pensions, and potential inheritances as dividend tax allowances dwindle and capital gains tax becomes less favorable.
- Given the potential changes in pension taxation and inheritance tax, high earners may be encouraged to reconsider their financial strategies, possibly opting for stocks and shares ISAs, pension allowances, or gifting allowances to minimize tax implications.
