Anyway, Lucy is a big earner. The 46-year-old works as a compliance director at a major bank and earns a six-figure salary.
Even though her income puts her among the top 5 highest-paid workers in Britain, she still doesn’t feel rich.
“My lifestyle is not what people would assume if they put it next to the number I bring home,” says Lucy, a single parent raising a daughter.
“I’m not going on holiday this year. I haven’t been abroad in the past five years. I sell used clothing on Vinted. When we go away for a day, we take sandwiches with us. I wouldn’t dream of going to Waitrose to eat.”
Lucy, who asked to change her name due to the sensitivities surrounding discussing her personal finances, says her salary is between £130,000 and £145,000. But, she says, her lifestyle “doesn’t match”.
“The reality is that money is not worth what it was.”
Lucy’s finances are not tight due to debt, gambling, or frivolous spending. What gives her the feeling that little has changed is the British tax and benefit system.
Because she earns more than £100,000, she is only entitled to 15 hours of free childcare instead of 30, and misses out on tax benefits, spending £18,000 a year to send her daughter to nursery.
On top of that are the costs of commuting from a city to her London office and a mortgage that has risen by £500 a month. Meanwhile, the bank where she works has frozen everyone’s wages, even though inflation has soared.
“I get almost 50% tax on everything. I found out that I need to earn £45,000 a year to be able to work. It’s quite shocking because I look at it and think, ‘how on earth do other people do that?’” says Lucy.
“Honestly, it’s exhausting to watch every penny and work really hard. It’s just endless bad news.”
Lucy’s fate is not unusual: the rising tax burden on the highest earners in recent years has made it increasingly difficult to feel wealthy in Britain.
“The Conservatives and the Coalition have significantly increased taxes at the top,” said Stuart Adam of the Institute for Fiscal Studies (IFS). “Since 2010, top incomes have grown less quickly than average and tax policy has focused on focusing taxes more on those at the top.”
Figures from the IFS show that someone earning £200,000 will pay at least £10,000 more in tax than in 2009.
Lower earners are still taxed less than in 2010, even after secret tax increases introduced after the pandemic.
In the decades before the financial crisis, taxes paid by wealthy people rose significantly, but this was driven by rising incomes rather than punitive tax changes.
Since 2010, the increases reflect higher taxes while incomes have stagnated. According to the IFS, the richest tenth of taxpayers have seen their income increase by just 1.5 percent since the financial crisis.
Despite stagnant wages at the top, the salary thresholds at which high earners are taxed have been reduced in real terms and tax-free allowances have been reduced or abolished.
“The effect of all this is that more and more taxes are being levied on high-income earners, when in reality we haven’t really seen that yet,” says Adam.
People like Lucy now pay about half of all income taxes, up from about 43% in 2010.
Meanwhile, all employees in the lowest paid bracket of 50% contribute 9.5%, just under 11.3%.
Costs have skyrocketed, just as the tax burden has risen: mortgages, private school fees, and childcare costs have all increased significantly.
Households with the highest incomes are currently experiencing the highest inflation due to the rise in mortgage costs, the Office for National Statistics has noted.
Their cost of living was 5% higher in March than a year earlier, compared with 3.9% for those on the lowest incomes.
Although they have a larger financial cushion to absorb such increases, many still feel pressured, says Olly Cheng.
Cheng is an associate director at Saunderson House and advises high earners on their finances. His clients are usually self-made business people or have lucrative jobs with the city.
“A lot of people who would be considered high earners are being pressured from different angles,” he says. “School fees are one thing, mortgage interest is another. The tax burden can sometimes be significant if you tip more than £100,000 – you may lose benefits such as free childcare. So you can give up a terrible one for not much extra income.
People also adopt more expensive habits as they gain more income. The rising costs of many of these are proving to be a burden.
“It’s a lifestyle flu,” says Cheng. “You earn a little more, you send your kids to private school, or you get used to spending a little more on your Ocado store.
“You have to make a good amount of money these days, especially after a few years of inflation, to really feel comfortable.”
Although the highest tax rates in Britain are much lower than in neighboring countries such as Germany and France, frozen tax bands mean many more people now pay the 40% rate.
According to HSBC, 16% of all taxpayers now pay the higher rate, compared to 10% at the turn of the millennium.
At the start of that period, people paying the higher tax rate typically earned 70% more than the average worker. Today it is only 45%.
This narrowing gap highlights the insidious consequences of frozen thresholds: as inflation drives up wages, more and more people are pushed to pay higher tax rates, even if their incomes are not significantly more than average.
The thresholds for both starting to pay income tax and paying the higher rate have been frozen since 2021. The threshold for the additional tax rate has been fixed since 2022.
Chancellor Jeremy Hunt confirmed last week that the threshold freezes will remain in place until at least 2028, when they are currently set to expire.
“While tax rates look nice and low, the reality is very different,” HSBC analysts said last week ahead of the election.
For some of the highest paid Britons, this has all become too much.
Simon Goldring, a self-employed tax advisor, packed up and moved to Dubai last year. The savings are enormous, he says.
“When I lived in Britain I paid a significant six-figure sum [in taxes] every year.”
In Dubai, his company pays corporate tax at a rate of 9% instead of 25%, and he pays no personal tax. There is also no threat of inheritance tax.
“I moved myself and moved a number of them [British] people here. You have people who work very hard, who are essentially giving away half their income for perhaps not the services they deserve,” he says.
Many Goldring customers realized during the pandemic that they could do their work anywhere and, faced with declining living standards, have decided to do just that.
“I don’t see it getting any better,” Goldring adds. “In recent weeks I have received three questions from wealthy and ultra-high net worth people who have had enough [of] paying too much tax, whether it is income tax or the dividends they receive.”
Adam says: “The higher tax rates get, the more you create a disincentive and the more you make Britain less attractive.”
Cheng says many people he works with complain about high taxes but feel trapped because their children go to school here or because they are reluctant to move away from elderly parents.
A change in policy is unlikely in the short term, Adam warns. Public finances are under pressure and the next government will almost inevitably have to increase taxes.
People like Lucy, who feel like they’ve worked hard and done everything right, are angry because the burden only increases. Removing VAT on private school fees will make things worse, she says.
“You’re stuck in this trap.”
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