How HENRYs can protect their wealth
High earners are being increasingly squeezed as fiscal drag, a cliff edge for support towards childcare, and a high tax burden bite.
Despite having a high salary, a growing group of professionals don’t have enough to enjoy the lifestyle of someone who is truly wealthy, with this cohort 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.
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High inflation and the cost of living crisis have eroded the amount HENRYs have left at the end of the month and fiscal drag means more of their earnings are being dragged into higher tax bands.
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HENRYs are also being hit hard by a quirk of the UK’s tax system, where those earning over £100,000 can end up paying an effective tax rate of 60% on a portion of their income while getting certain benefits like some free childcare revoked at the same time.
How HENRYs are being hit by high tax
The highest earners in the UK are the most lucrative for the government, with 60% of the total income tax collected in the 2026/27 tax year expected to be paid by the top 10% of earners (those earning around £70,000 and above).
The average earner in the UK makes around £39,039 a year, and pays around £5,294 in income tax each year. However, someone earning £100,000 a year will pay around £27,422 in tax, over five times more than the average earner despite only earning around 2.5 times the average salary.
By the time you earn £120,000 a year, you will pay almost 7.5 times more tax (around £39,440 per year) than the average earner despite only earning just over three times more than the average.
High earners pay the higher rate of income tax (40%) on income over £50,271 to £125,140 and any income above that is taxed at 45%. But a quirk of the tax system means once you earn more than £100,000, you start paying a marginal tax rate of 60%.
This happens because your tax-free personal allowance starts to taper away at a rate of £1 for every £2 you earn above £100,000 until it is entirely removed at £125,140.
This means high earners end up paying an effective tax rate of 60% on income over £100,000 and up to £125,140 – and this can get to as high as 69% for those who are also paying off student loans.
More high earners are being pushed into this trap as their income rises each year but the £100,000 tax trap remains unchanged and tax thresholds haven’t risen since April 2021.
HENRYs with young children are penalised even more
There are other penalties that come when you earn a salary over £100,000.
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 there’s a cliff edge in eligibility – you automatically lose access to this government scheme if you earn a penny over £100,000 a year.
Tax-free childcare, which is worth £2,000 a year per child, is also removed when your earnings hit £100,000, although the universal 15 free hours of childcare a week for 38 weeks a year for 3 to 4 years olds is retained.
You also start losing some Child Benefit once a person’s individual income is over £60,000. It’s lost entirely at £80,000.
The structure of household income can make a difference.
For two-parent households with two nursery-aged children, with total income of £120,000, that difference can be as much as £9,800 a year, investment firm IG modelling shows. This is because of the removal of Child Benefit and funded childcare hours.
For example, where there’s a primary earner bringing in around £110,000 and the second person earns £10,575 (the minimum required to qualify for funded childcare), the household loses £2,300 in Child Benefit per year and £7,500 in funded childcare support.
Additionally, earning £110,000 a year means the high earner would be caught in the 60% tax trap.
In comparison, if there are two mid-earners in a household, who both earn £60,000 each, they wouldn’t lose Child Benefit, tax-free childcare or face the £100,000 tax trap.
What HENRYs can do to “become rich”
There are some steps you can take to reduce the pain of high taxation.
Increase your pension contributions
Fundamentally, the only way for HENRYs to escape the 60% tax trap is to reduce their taxable income.
Pensions are a powerful financial tool, as you get tax relief on contributions and this will push your annual income to below the £100,000 threshold, allowing you to avoid the tax trap and the removal of the 30 free hours of childcare.
Malvee Vaja, a financial planner at Rathbones, said: “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.”
For example, if you earn £110,000, putting an extra £10,000 into your pension means your income would drop to £100,000.
This means you wouldn’t lose the personal allowance so wouldn’t be taxed at 60% on a portion of your income. Instead, the money is put tax-free into your pension for when you retire.
Beyond tax-efficiency, focusing on building up your pension pot while you are stuck in the tax trap zone can be hugely beneficial for your future – especially when you only expect to take money from your pension in 20 or 30 years time, according to Vaja.
“What [maximising your pension contributions] allows you to do is, when your salary gets to a certain level, and you’re not able to use your pension allowance that much, you’ve still got a really stable base in your pension. That then, if invested correctly, will keep accumulating wealth for you in the background.”
She adds that having a strong base in your pension early on means that if at some point you need to reduce your pension contributions for any reason, your pension “will still work hard for you while your career and your salary goes up and up and up.”
Know your tax-free allowances
You should also make the most of your tax-free allowances to protect your savings and investments from even more taxation. But Vaja says many of her high-earning clients do not know much about how to maximise those allowances.
She said: “It’s a case of knowing what to do. They do some things like putting money in their pension or using their ISAs, but they’re not thinking, ‘Am I maxing out my pension? Am I using the tools that I have most efficiently?’”
For example, you can put £20,000 per year into ISAs. You don’t have to pay any tax on any savings interest or investment returns you make on money in an ISA.
Meanwhile, the pensions allowance means you can contribute 100% of your salary up to £60,000 into your pension a year. You can also use the pensions carry forward allowance means you can use any unused annual allowance from the past three years.
This in particular can be helpful for HENRYs who are maximising their pension while in the tax trap zone, Vaja notes.
Beware lifestyle creep
Once you are earning a six-figure salary, you are firmly in the top 6% of earners. While it may mean you can afford to do your weekly shop at more expensive supermarkets, you are not yet at the point where you can spend money without thinking.
Vaja warns that lifestyle creep – the tendency for people to increase their spending on luxuries when their earnings increase – is one reason many of her clients still feel poor despite their high salaries.
She said: “Don’t let lifestyle creep happen. Try and control the luxury items that you spend money on, like a luxury gym membership, or an expensive car if you don’t really need them. If you’re living in London, spending £300 to £600 a month on a car that you barely use doesn’t seem worthwhile.”
Vaja recommends trying to keep lifestyle creep under control. This then gives you more surplus income that can be put into pensions, ISAs and general investment accounts, where you can make use of tax-efficient allowances.
You have time on your hands
While being stuck in the 60% tax trap and having benefits like childcare taken away can be painful, Vaja says that despite the doom and gloom there is hope on the horizon.
As younger earners, most HENRYs are not even halfway through their working lives and therefore have a lot of time on their hands to increase their earnings, get out of the tax trap zone, and build up their long-term finances to finally “become rich”.
“HENRYs have time on their side,” she said. “Getting a decent amount in your pension quite early on and using your carry forward allowance so you’ve got a sizable amount in your pension, means it can work in the background for you.
“Make sure it’s invested and make sure it’s invested in the right way with a diversified portfolio that’s aligned to your risk level.”
She adds that people in their 20s or 30s have a much longer time horizon for their investments to ride out volatility in the market so may be able to afford to take on a bit more risk in their pensions.
“Sometimes I think the danger for a lot of people is thinking, ‘This is my pension, therefore I need to be overly cautious with it’, but being overly cautious sometimes means not taking enough risk, and I think that’s a big problem.”
