Are YOU a high earner? If so, the cost-of-living crisis could be the nasty shock you least expected

Do you think that you’re immune from the current economic situation? You may need to think again. In this blog, I offer some cautionary advice for higher earners.

If your income is, shall we say “healthy”, and that thanks to some careful financial planning your predicted financial future looks fairly solid, barring some sort of catastrophic global event, nothing is going to change in your world all that much.

The news headlines concern you, but they’re mostly at the edge of your life. On the periphery, so to speak. You’re starting to notice minor changes, but they’re mostly insignificant. Your higher salary, or the income from your successful business operation will protect you.

Life is generally OK.

Or, at least that’s what you may think.

In my opinion, with regret, this is simply not the case. Your possible conviction that the cost-of-living crisis is something that’s only likely to impact people on the breadline is out of kilter. In other words, if I may be so bold – most probably incorrect.

This incoming tide of price rises will affect all of us. Including higher earners. Why, and how? Due to the combination of four important aspects: energy, tax, inflation and interest rates. ?

Let’s look at each of these in turn.

Energy Bills

Already a high-profile issue in the press, we’re just about to experience what can only be described as an eye-wateringly steep increase in our gas and electricity bills. On average, energy costs are rising by ￡693 per year for an estimated 22 million people, with effect from early April on non-fixed tariffs. That’s a 54% increase.

The reasons are manifold.

Without going into too much detail, or touching on controversy, wholesale costs of natural gas have risen, therefore the energy price cap set by Ofcom has also. A lot. Supplies from Russia, Norway and the North Sea are low, too. As gas prices tend to feed into electricity costs, the latter have also escalated.

Let’s review this concept, average. Households with say 2-3 bedrooms are deemed to be “standard”, and have more common energy usage. Properties where there is greater usage, say with 5 bedrooms, for example, will see bills rise from ￡1,662 to ￡2,514. The proportion is higher; therefore your bills will be higher.

Tax

Although National Insurance isn’t an “official” tax, many simply assume that it may as well be. The news here isn’t entirely good, not least for those with higher than median earnings.

In the last couple of weeks, the Chancellor has confirmed that, despite the crisis, and against the government’s manifesto pledge, there will be a 1.25% rise in NI contributions from April. This figure means that for someone typically earning ￡50,271, the entry level rate for higher-rate tax, will be paying ￡508 more in contributions.

However, someone on ￡100,000, already having lost their personal allowance, and effectively already paying more, will owe an extra ￡1,131 to HMRC.

There’s more, I’m afraid.

With regard to tax, the council tax rebate that will become available to help homeowners pay their bills, won’t apply to properties in band E or higher. This means that a significant percentage of homes in the high-value areas of south east England and elsewhere will be left high and dry.

Inflation

The current rate of inflation is 4.9%.

Inflation started to rise in 2021, partly as a result of the economy attempting to recover from the Covid crisis. Due to opening up, consumer demand pushed up prices, yet those sellers failed to keep pace – and scarcity pushed up costs, as it often does. This, along with the sharp rise in energy all added to the pot.

In fact, inflation reached as high 5.4% in December last year, and may rise further throughout 2022.

Whatever your lifestyle, and whatever goods and services you buy on a regular basis, the inflation rate will affect you. The power of the pound in your pocket has taken a knock.

Interest Rates

The Bank of England has recently doubled its interest base rate to 0.5%, the second rate rise in seven weeks, with more on the cards for later this year. It’s worth knowing that this increase could put up your mortgage.

Consider these facts. According to the Telegraph, seven in 10 high income households owe an average of ￡155,000 on their home. Thus, the rises from 0.1%, where it was at the start of December to 1.25% by the end of 2022, will result in an extra ￡1,938 more per year.

That’s the best part of ￡2,000 more on your mortgage.

And, do you have a second home? Perhaps on a buy-to-let basis or a property abroad? Record-low rates may have encouraged these investments, and whilst in the words of Private Fraser from Dad’s Army, we’re not “all doomed”, as an experienced independent financial adviser, it would be remiss of me to say that everything in the garden is rosy – when clearly it’s not. Or at least, not right now.

What would I advise?

In my view, any cost of living or economic crisis always hits the poorest. Without a doubt. Essential spending has to be cut back – and where or how does one make that awkward choice?

However, if you’re a higher earner, you too will be feeling the pinch.

Right now, therefore, forewarned is forearmed, therefore I would recommend getting in touch with your financial adviser for a review. Share as much as you can for a full picture of where you are now, as well as?where you would like to be in say 5, 10 or even 20 years’ time. Importantly, think about your pinch points, or where you think your finances could be most vulnerable. This way, your adviser’s expertise could shed a reassuring light right now, and help you make good plans for the future.

Do get in touch if you’d like to organise a review with me. I’m told that my approach is jargon-free, empathetic and straightforward. Hopefully just what you need in these challenging times.

You can contact me on 0345 505 3500.

In the meantime, hold fast. Our economy fluctuates, and better times will be with us once again.