Warning ahead of Healey’s first Budget
Key Points
- Chancellor John Healey delivers his first Budget on 28 October, with higher earners watching for changes to income tax thresholds, pension tax relief and taxes on wealth.
- A new wealth tax is not widely expected, but proposals from academics and a group of millionaires have kept the idea in circulation.
- Prime Minister Andy Burnham has pledged not to raise the rate of income tax and has reportedly shelved plans to replace stamp duty and council tax.
- The £100,000 earnings point still triggers an effective 60% tax rate and the loss of all government childcare support.
- AJ Bell says pension contributions, ISAs and family allowances remain the main tools for cutting a tax bill before any changes land.
The top 50% of UK earners now pay 90% of all income tax and the top 1% pay 27%, according to analysts at AJ Bell.
The firm set out the tax risks facing higher earners ahead of Chancellor John Healey’s first Budget on 28 October. HMRC data shows the tax take on investment income alone will reach almost £20 billion in 2026/27.
Two groups sit at the centre of the Budget question. AJ Bell describes HENRYs – high earners, not rich yet – as younger workers on incomes around £100,000 who have not yet built up significant assets, and HEROs – high earners, rich and older – as those who have earned at that level for longer and hold substantial wealth.
Wealth tax proposals have circulated in recent weeks. A group of academics put forward a 2% tax on assets above £100 million last month, and a group of millionaires called for a 2% tax on sums above £10 million.
AJ Bell said it does not expect a wealth tax of this kind at this Budget, pointing to the administrative complexity, the difficulty for people holding assets but little income, and the scope for avoidance.
Prime Minister Andy Burnham has previously argued for scrapping inheritance tax and replacing it with a care levy to fund a joined-up health and social care system, and confirmed during his by-election campaign that he would consider the idea again.
A fixed percentage charge on an estate would take more from larger estates, and it remains unclear whether it would carry the exemptions and allowances that many families currently use to reduce an inheritance tax bill.
Investors have already absorbed several rounds of change. Dividend tax and capital gains tax have both seen allowances cut and rates raised, and the last Budget raised dividend tax from 2026, raised tax on savings and property income from 2027, and cut the cash ISA allowance for under-65s.
Property and income tax
Burnham has reportedly ruled out replacing stamp duty and council tax with a property or land tax for now. The high value council tax surcharge remains scheduled for 2028 and will apply to properties worth £2 million or more.
Burnham has also pledged not to increase the rate of income tax and has criticised the unpopularity of the frozen personal allowance and income tax thresholds. Healey retains other options, including a further cut to the additional rate threshold, which fell from £150,000 to £125,140 in April 2023 and has stayed frozen since. HMRC data shows 1.3 million people will pay the 45% additional rate this year, more than double the 2021/22 figure.
The Prime Minister has also floated reintroducing the 50p rate of tax, while the think tank Bright Blue has proposed a top rate of 52%.
AJ Bell has urged Healey to commit to a pensions tax lock ahead of 28 October, pledging not to alter tax relief or tax-free cash, to stop speculation pushing savers into hasty decisions.
The £100,000 point remains the sharpest edge in the system. Anyone earning between £100,000 and £125,140 faces an effective tax rate of 60%, because £1 of personal allowance disappears for every £2 earned above £100,000, with the allowance gone entirely at £125,140.
Crossing £100,000 also removes all entitlement to tax-free childcare, worth up to £2,000 per child a year, all 30 hours of funded term-time childcare for children aged nine months to three years, and half of the 30 hours for children aged three to four – a package worth more than £25,000 a year for a family with two children.
The tapered annual allowance for pensions creates a second threshold. It applies when earnings exceed £200,000 and adjusted income, which includes pension contributions, exceeds £260,000. The annual allowance then falls by £1 for every £2 of adjusted income above that level, down to a floor of £10,000, and the frozen adjusted income levels pull more earners into the taper each year.
What higher earners can do
Pension contributions attract tax relief at the highest marginal rate and reduce adjusted net income, the measure HMRC uses to assess childcare eligibility, which allows some earners to move back below the £100,000 cliff edge.
Savers paying tax on interest can shelter money in a cash ISA, and investors can use the £20,000 stocks and shares ISA allowance, moving existing holdings inside a wrapper through the Bed and ISA process.
Married couples and civil partners can transfer assets between them without triggering a tax bill, allowing both to use a £20,000 ISA allowance, and children under 18 have a £9,000 Junior ISA allowance.
Beyond those wrappers, AJ Bell points to low coupon gilts, where most of the return comes as a capital gain and escapes capital gains tax, and to general investment accounts managed alongside the annual capital gains tax allowance.
Venture Capital Trusts and Enterprise Investment Schemes carry tax perks but sit at the high-risk end of the market and suit experienced investors with large, diversified portfolios.
