The measures introduced in this year’s Autumn Budget could leave a typical high earning family thousands out of pocket, new research has found.
According to analysis from wealthtech advisory platform Y TREE, high earners could lose out on nearly £280,000 over the next twenty years as a result of Reeves’ Budget policy changes, jumping to staggering near £1m by thirty years.
This was credited to changes to the tax system coupled with factors such as VAT on school fees squeezing finances further, leaving many young families forced to rely on the ‘bank of mum and dad’ or ultimately change their inheritance plans.
Marc Meshaka, head of financial modelling at Y TREE, said: “At first glance, the
Budget’s measures appear to have a small immediate impact on wealth.
A couple of percentage points more on dividends, changes to salary sacrifice on your pension contribution, a surcharge on £2m plus homes, and frozen thresholds might sound modest in isolation.
But… small changes can compound into a substantial hit to future wealth.”
Income tax
Income tax thresholds were unchanged in the Autumn Budget, but many have argued the extended freeze will break Labour’s manifesto pledge not to hike taxes for working people.
The £8bn stealth tax will lead to 920,000 more Brits paying 40 per cent tax on their income and 780,000 more people paying into government coffers at the basic rate, according to the Office for Budget Responsibility (OBR).
But over time, due to inflation, the effective tax rate of an earner will change substantially, with those earning between £75,000 and £100,000 predicted to be significantly impacted.
This is due to the fiscal drag leaving high earners more likely to be pulled over £100,000 threshold upon wages increasing, causing them to lose a chunk of earnings to tax.
On the other hand, wealthy earners will be largely unaffected by the frozen thresholds due to already paying the top rate.
Pensions
Similarly, changes to the pension system is also expected to hit high earners and the middle class, who are most likely to rely on salary sacrifice schemes.
Under the most popular scheme, pension contributions, employees effectively give up a portion of their salary in exchange for boosting their pension contributions, reducing their income tax bill.
The system is most effective for earners and families hovering over the £100,000 threshold, allowing them to get back 30 hours of free childcare.
But, salary sacrifice schemes have been pared back, with the exemption capped at £2,000 per employee, per year, from April 2029.
This means any further pension contributions over this amount will be subject to standard national insurance rates of eight per cent on salaries under £50,270 and two per cent on any income above that.
Reeves argued the changes were needed due to the schemes failing to benefit ordinary earners, while wealthy earners in particular those in “the financial sector” able to utilise the system more.
While the change will see those on the UK average lose £39,039, lose approximately £215, according to analysis from Finder, those on a salary of £75,000 per annum will also see their take home pay tumble by £140.
Mansion tax
High earning families, particularly in London, will also feel the impact of ‘mansion tax’ from April 2028.
The tax will see properties valued over £2m, receive an additional surcharge on top of existing council tax bills.
For properties valued between £2m and £2.5m they will be slapped with a £2,500 surcharge, while those valued between £2.5m to £3m will be subjected to an extra £3,500 per annum.
The wealth tech platform urged high earners to consider making changes to their finances in order to offset some of the changes, including comprising on lifestyle, changing investment portfolios and even working longer than expected.
Eliana Sydes, Head of Client Team and Operations at Y TREE, said: “A few small changes little and often, implemented over the course of several years, add up.
Our modelling brings to life what the Budget can really do to a family’s finances and life outlook, and it is stark.”