What high earners might be wary of in Healey's first Budget

Higher earners already pay a massive chunk of tax here in the UK as the top 50% of earners pay 90% of all income tax, and the top 1% pay 27%. If they make over £100,000, they also fall off the cliff edge and lose incredibly valuable government support.

If you have a significant portfolio outside ISAs and pensions, you’re also highly likely to be handing a wedge of it over to the taxman each year. The tax take on investment income alone is projected to hit almost £20 billion in 2026/27, data from HMRC showed.

Henrys (High Earners, Not Rich Yet) might be on incomes around £100,000, but they’re younger and often have not yet built up significant assets. Heros (High Earners, Rich and Older) have been earning at this level for a while and have built up assets.

These two groups face the brunt of taxes, as well as the £100,000 line, and may be particularly wary about whether they'll be paying even more tax after Andy Burnham and John Healey’s inaugural Budget on the 28th October.

Wealth tax threats for Heros

Budget worries about a potential wealth tax are perfectly understandable for Heros, who have more to lose than most. 

Last month a group of academics proposed a 2% tax on assets over £100 million and a group of millionaires called for a 2% tax on sums over £10 million.

A new wealth tax of this kind is not broadly expected to be announced in this Budget, because it’s complicated to administer, tough on those with lots of assets and a lower income - particularly if they don't have the cash to pay the tax, and can encourage avoidance. However, it will still cause disquiet among savers and investors.

Heros might also be worried about potential tax changes to cover the cost of social care – and whether they would be likely to fall hardest on those who have built significant assets by the end of their lives. In the past, Burnham has suggested inheritance tax ought to be scrapped and replaced with a ‘care levy’ to fund a more joined up national health service and social care system. During his by-election campaign he confirmed he wouldn’t be afraid to consider the idea again.

If this was to be a fixed percentage of your estate, then the bigger your estate the more you pay. It’s not clear whether there would be the kinds of exemptions and allowances that enable many Heros to cut their inheritance tax bill, or whether it would be designed to squeeze out these options. It also remains to be seen whether the new chancellor is keen to wade into the thorny issue of inheritance, after it caused so much grief for his predecessor.

Even if there’s no specific new wealth tax, investors have felt the squeeze in recent years, and it might not be over yet. Both dividend tax and capital gains tax have seen allowances slashed and rates hiked in recent years. The last Budget delivered the triple whammy of higher dividend tax from 2026 and higher savings and property income tax from 2027 – alongside cuts to the cash ISA allowance for under 65s: and Healey could add to the pain.

Heros, who may be living in a pricier property and may also own a property as an income producing investment, can take some comfort from the fact that Burnham has clarified his position regarding property taxes. He had been talking about scrapping stamp duty and council tax and replacing them with a property or land tax, but he has reportedly ruled this out for now.

However, the high value council tax surcharge is still scheduled for 2028, for properties worth £2 million or more, and given all that Burnham has said about the unfairness of the current system, those with more expensive homes will naturally be worried this is the thin end of the wedge.

Tax threats for higher earners

Both Henrys and Heros also face the question of whether there could be any additional taxes on their income. The good news is that Burnham has pledged not to increase the rate of income tax. He has also made comments during his by-election campaign about how unpopular the frozen personal allowance and income tax thresholds have been, which would make it politically difficult for him to extend this.

However, there are options beyond this. Chancellor Healey could move the additional rate tax threshold. It was cut from £150,000 to £125,140 in April 2023, and remains frozen. This year, 1.3 million people are set to pay the 45% additional rate – more than double 2021/22 levels, as per HMRC data. It has already raised significant sums, so Healey might choose to cut the threshold again, bringing another group of people into paying 45% tax.

Alternatively, Burnham has previously suggested reintroducing the 50p rate of tax. There are other voices out there calling for higher taxes for higher earners, with think tank Bright Blue suggesting a top rate of 52%. Back when he was campaigning for election, Burnham refused to be drawn on the issue, but higher earners may well be worried.

One question that always comes up before a Budget is whether the tax relief on pensions is safe – something that would particularly affect higher earners.

The consistent re-emergence of the topic ahead of each Budget is why AJ Bell has urged Healey to commit to a Pensions Tax Lock well in advance of 28th October by pledging not to alter tax relief or tax-free cash and prevent damaging speculation pushing people into making knee-jerk decisions about their long-term finances.

Even if there’s nothing announced to specifically target these groups, frozen thresholds will continue to hit hard. Each pay rise will push many higher earners closer to the £100,000 point, and creeping over this can be incredibly costly. Anyone with earnings between £100,000 and £125,140 faces an effective tax rate of 60%, because for every £2 you earn over £100,000, you lose £1 of your personal allowance. Once you earn £125,140, you will have lost the allowance entirely, and you move into the 45% tax bracket.

To make matters worse, if you have children, once you cross this threshold, you lose government support for childcare. This includes all entitlement to tax-free childcare, worth up to £2,000 per child per year, all of the 30 hours funded term time childcare for nine-month to three-year-old children and half of the 30 hours for children aged between three and four. For someone with two children that might be worth more than £25,000 a year.

Likewise, crossing the threshold into the tapered annual allowance for pensions can throw a spanner in the works. Very broadly this kicks in when you earn more than £200,000 and your ‘adjusted income’ is above £260,000. This includes a number of things on top of your net income, but most significantly it includes pension contributions.

For every £2 your adjusted income goes over £260,000, your annual allowance for the current tax year reduces by £1 – until you’re left with an annual allowance of £10,000. The fact that the adjusted income levels haven’t budged means over time more higher earners will be dragged into this net.

What can you do?

It’s worth seeing whether you can take steps to cut your income tax bill today. If you’re paying tax on your savings, you could consider moving some of them into a Cash ISA. But one of the most effective approaches is to take advantage of your pension. 

You can receive tax relief at your highest marginal rate, so it means you’re building more for your future too. If you have fallen foul of the tapered annual allowance, you can still make use of whatever allowance you have left.

If you have crossed the £100,000 threshold for childcare support, pensions may be able to protect some of your personal allowance. When you pay into your pension, it comes off what’s known as your adjusted net income – which is what’s used to calculate your eligibility for childcare support. It means some people can boost their pension contributions, build a better retirement, and bring themselves back from the edge of the cliff at the same time.

If you’re worried about tax on investments, then it makes sense to use your £20,000 a year Stocks and shares ISA allowance. If you have investments outside ISA wrappers and the available allowance, you can move them inside using the Bed and ISA process, while if you are adding to your investments, Stocks and shares ISAs are a natural home for the money.

It’s also worth considering the allowances of your family. If you’re married or in a civil partnership, you can transfer assets without triggering a tax bill, so you can both pay £20,000 into your ISAs. Children under the age of 18 also have a Junior ISA allowance of £9,000 which you can pay into each year.

Beyond these tax wrappers, your next step will depend on the size of your portfolio and your attitude to risk. For those who want to stay down the lower risk end of the spectrum, low coupon gilts may be an option. Buying and holding to maturity means most of your return will be a capital gain – and gilts are free of capital gains tax.

For a lot of people, a sensible next step is taxable accounts, whether that’s savings or a general investment account. You will need to manage them tax-efficiently, including taking advantage of your annual capital gains tax allowance.

For those who are comfortable taking more risks who have a large, diverse portfolio already, tax-efficient vehicles for smaller company investments like Venture Capital Trusts and Enterprise Investment Schemes may be worth considering. These are high risk investments for experienced investors, but they offer growth potential and some great tax perks.

When you’re on a higher income, especially if you have built assets, the stakes are higher. At the same time, some of your options become more complicated. It’s one reason why Henrys and Heros might consider whether it’s a good idea to speak to a financial adviser ahead of any potential Budget changes.