If you’ve progressed in your career and reached a lot of your professional goals in a relatively short space of time, you could be a “HENRY”. This acronym stands for “high earner, not rich yet”, and it describes an individual who has strong earning potential but may not have started building wealth for the future yet.

There are several reasons why this could be the case.

“Lifestyle creep” could make it more difficult to build wealth for the future

The term HENRY normally refers to somebody who earns £100,000 or more, but doesn’t have the level of wealth in pensions, savings, or investments that you might expect.

There are several reasons why you might find it challenging to build wealth, despite your increased earning potential. For instance, you may be affected by lifestyle creep – the tendency to spend more as your earnings increase. It’s only natural that you’ll want to reap the rewards of your hard work, so you may take more expensive holidays, eat at nicer restaurants, or upgrade your car, for example.

Additionally, rising house prices and increases in interest rates in the past few years could mean that you have significant mortgage costs, especially if you move into a larger property.

As a result, you may find that you spend a significant portion of your income each month, and don’t have much left over to contribute to savings and investments for the future.

High earners could fall into the “60% tax trap”

While increased earnings could help you improve your quality of life and potentially save for the future, you may also pay more Income Tax. In fact, if you’re a HENRY earning £100,000 or more, you could be caught in the “60% tax trap”.

This has to do with your Personal Allowance – the amount you can earn each year before paying Income Tax. In 2024/25, your Personal Allowance is £12,570.

However, this allowance reduces by £1 for every £2 that your earnings exceed £100,000. As a result, if you earn £125,140 or more, you don’t have a Personal Allowance at all. This tapering of the Personal Allowance means that your earnings between £100,000 and £125,140 could be effectively taxed at 60%.

For example, if you earn £100,000 and then receive a £1,000 wage increase, you would:

• Pay £400 Income Tax on the £1,000 – your marginal rate of 40%
• Lose £500 of your Personal Allowance, and this amount would also be taxed at 40%, meaning you pay another £200.

Consequently, you pay a total of £600 tax on the additional £1,000 you earned – an effective rate of 60%.

Finding ways to avoid the 60% tax trap and mitigate the Income Tax you pay could mean that you have more funds to contribute to savings and investments for the future.

4 crucial financial planning tips for HENRYs

1. Create a detailed budget

Your budget is the foundation of your financial plan as it allows you to control your spending and free up funds to contribute to your savings. This is especially important if you’re a higher earner and experience lifestyle creep.

By listing all your expenses, you can identify which costs are necessary and where you might be able to cut back. You can then divert any additional funds to your savings, so you can begin building wealth for the future.

2. Save an emergency fund

Now that you have a budget in place and can contribute to savings, you may want to focus on building an emergency fund. This cash buffer can help you cover unexpected costs such as home repairs or replacing your car. Alternatively, if you were to lose your job, you could use these emergency savings to fund your lifestyle for a period until you’re back at work.

Crucially, you can absorb these financial shocks without relying on expensive borrowing. Normally, it is recommended that you keep three months’ worth of expenses in your emergency fund, but you may want to hold more.

3. Start investing for the future

Your cash savings could help you maintain financial stability and reach short-term goals such as paying for a holiday. However, you may also want to start building wealth for long-term goals including your retirement.

For goals that are five or more years away, investing could allow you to generate inflation-beating growth. You might consider contributing to a:

• Stocks and Shares ISA – This is a tax-efficient option as you won’t pay Dividend Tax or Capital Gains Tax (CGT) on investment returns. You can contribute up to £20,000 across all your ISAs each year.
• General Investment Account (GIA) – If you’ve used your ISA allowance for the year and want to continue investing, you may pay into a GIA. Bear in mind that you could pay tax if you receive dividends or make a profit from selling investments in a GIA.

We can help you create a balanced investment portfolio that allows you to build wealth and work towards your financial goals.

4. Consider increasing your pension contributions

Paying into your pension is an effective way to build wealth for retirement and could help you reduce your Income Tax bill too.

This is because the Income Tax you pay is calculated based on your earnings after pension contributions have been deducted. As such, increasing your contributions could reduce your taxable income. You also benefit from tax relief at your marginal rate on the payments too.

You receive 20% tax relief automatically, so £100 going into your pension only “costs” you £80, because the government adds the additional £20. You may also be able to claim another 20% or 25% through self-assessment if you’re a higher- or additional-rate taxpayer.

If you earn £110,000 a year, you effectively pay 60% tax on earnings that exceed £100,000 because you lose some of your Personal Allowance. Yet, if you contributed an additional £10,000 to your pension, you would receive 40% tax relief on this amount.

Crucially, your taxable income would now be £100,000, so you wouldn’t lose any of your Personal Allowance.

Bear in mind that you can only benefit from tax relief on your contributions up to the Annual Allowance. This is the total amount you can contribute to your pension each year – including employer contributions and tax relief – without triggering an additional tax charge. In 2024/25, the Annual Allowance is £60,000 or 100% of your earnings, whichever is lower.

However, if you’re a high earner or have flexibly accessed a defined contribution (DC) pension, your Annual Allowance may be lower.

We will consider this when we help you review your pension contributions and potentially reduce the Income Tax you pay.

Get in touch

If you’re a HENRY and want to start building wealth for the future, we can support you.

Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.