- Household costs were up 2.8% in the year to June – that’s down from 3.6% in the year to March (source: Household Costs Indices for UK household groups - Office for National Statistics)
- Costs for high-income households have risen faster (2.8%) than for low-income households (2.7%)
- Over the past five years, high-income households have seen prices rise 32.8% and lower-income households saw them increase 32.7%
- It’s no wonder higher earners may be dreading a Budget that could potentially target them with more tax
Sarah Coles, head of personal finance at AJ Bell, comments:
“Higher earners have already faced a horrible squeeze on their wallets, with their costs rising faster than for those on lower incomes and up almost a third in five years. It might not be over yet either, because there could be more pain to come in the Budget.
“The fact that costs rose faster for higher earners than lower earners comes down to the fact that during this period, price rises eased slightly for the things that dominate the spending of lower income households – like food and energy. The energy price cap fell in April, while the price of food has been rising more slowly – and some prices have actually dropped.
“Meanwhile, costs have been rising for the things that higher income households tend to spend more on. Notably this includes the price of petrol. Higher earners tend to own more vehicles, drive bigger cars, and make more journeys, all of which means they face disproportionately higher costs when petrol prices rise. They have also been hit by rising prices in hotels and restaurants. They’re more likely to take mini-breaks and eat out than those further down the income spectrum.
“A 2.8% rise in prices doesn’t feel like much to write home about, but higher inflation has been adding up. Higher earners have seen their costs rise by almost a third in the past five years – at 32.8%, which is very marginally faster than for those on lower incomes.
“Those on higher incomes spend more on non-essentials, so they have more room in their budgets to cut costs when they need to. However, with costs rising so fast for so long, budgets will be getting tighter and life more uncomfortable. It’s why they may be dreading the thought that those with higher incomes and more assets could be targeted if the government wants to raise additional funds in the Budget.
“This government wouldn’t be the first to use higher earners as useful tax-producing machines. The freezing of the income tax thresholds has meant higher rates of tax come in earlier down the pay scale. Meanwhile, more expensive properties are set to be hit with the high value council tax surcharge from April 2028. Successive governments have also targeted savers and investors, by cutting annual allowances for capital gains and dividend tax, as well as increasing the rates.
What can you do?
“This is why it’s so important for higher earners to consider how to avoid paying more than their fair share of tax. Pension contributions attract income tax relief at your highest marginal rate, so can bring down the amount of tax you pay at higher rates, while boosting your income in retirement. Meanwhile, money saved in a Cash ISA can grow completely free of income tax, so can be a sensible home for savings if you have the available allowance.
“Investments within Stocks and Shares ISAs are free of both dividend tax and capital gains tax, so are a sensible place to start. If you have existing investments outside an ISA, you can consider using a Bed and ISA to move up to £20,000 worth into the tax wrapper in the current tax year – as long as you have the ISA allowance available.
“There are some sensible planning steps to consider too, including taking advantage of your capital gains tax annual allowance, realising gains within the £3,000 allowance each year. You can also use any losses to offset gains made in the same tax year, to reduce the amount that could be subject to tax – and carry forward any unused losses from previous years. Finally, if you’re married or in a civil partnership, you can share assets between you without triggering a tax bill, so you can both take advantage of your allowances.”
