Higher Earners Consider Rejecting Pay Hikes Over Tax Concerns

More than half of individuals earning £100,000 or more would contemplate declining or deferring a pay rise if it meant a higher tax liability, according to a survey. This sentiment stems from frozen income tax thresholds in the UK, which increasingly push higher earners into elevated tax brackets following salary increases.

The survey, conducted by RBC Wealth Management, polled 750 individuals categorized as "High earners, not rich yet" (HENRYs). These individuals earn £100,000 annually but may not possess substantial savings or investments, often due to high living costs such as housing and childcare, student loan repayments, and lifestyle expenditures.

Forty-six percent of HENRYs are reportedly increasing their pension contributions to reduce their taxable income, a strategy to mitigate the impact of frozen tax thresholds. These thresholds have been stagnant since April 2021, meaning that pay rises now pull more individuals into the higher (40%) and additional (45%) tax rate bands.

Specifically, those earning over £50,270 face a 40% tax rate on income above that level. An additional complication arises for those earning between £100,000 and £125,140, who effectively face a 60% marginal tax rate on a portion of their income. This occurs because their tax-free personal allowance, typically £12,570, is gradually withdrawn by £1 for every £2 earned above £100,000 until it is completely eliminated at £125,140. This reduction effectively increases the marginal tax rate in that income bracket.

"What many people don’t realise is that the £100,000 “cliff edge” isn’t just about losing your personal allowance and facing a 60 per cent marginal income tax rate," said Daniel Hough, director at RBC. "It’s also the point where childcare support drops away completely, and for families with multiple young children that can be worth tens of thousands of pounds a year."

This situation is further exacerbated by the abrupt withdrawal of childcare benefits for parents earning over £100,000. In England, for instance, parents lose their entitlement to 30 hours of free childcare per week at this income level. HM Revenue & Customs estimated that nearly 1.5 million people paid the effective 60% tax rate in the last tax year due to the loss of their personal allowance.

The freeze on the £100,000 threshold, which has persisted under multiple governments, has transformed what was once a niche tax issue into a concern for a growing number of earners.

When asked how they would handle an unexpected bill of £2,000 to £5,000, 48% of the surveyed HENRYs indicated they could not access savings and would need to resort to loans, financial assistance from family or friends, selling investments, or requesting salary advances. This highlights the financial precarity some high earners experience despite their income levels.

Strategies to mitigate the impact of the 60% tax trap include making additional pension contributions. For example, an £8,000 contribution, augmented by £2,000 in basic-rate tax relief, effectively adds £10,000 to a pension pot and reduces adjusted net income. Reducing adjusted net income to below £100,000 can restore the full personal allowance.

Other methods for lowering taxable income include participating in salary sacrifice schemes for benefits like cycle-to-work or electric car leases, although these are set to be capped at £2,000 per year from April 2029. Charitable donations utilizing Gift Aid also contribute to reducing adjusted net income in a similar fashion to pension contributions.