Feeling the squeeze? How some London HENRYs are making their money go further with a SIPP pension

At a glance: SIPP pensionsA six-figure salary doesn’t guarantee a comfortable life for London’s HENRYsWith the 60 per cent tax trap and the loss of childcare support, many are feeling the squeezeA SIPP can help you reduce your adjusted net income and invest in your futureThis helps you reduce your effective tax rate and access childcare schemesA £10,000 gross contribution could cost just £4,000 when tax relief is claimedWith a Trading 212 SIPP, there are no monthly fees or commission. Other fees may applyLondon has never been the cheapest city to live in, but the financial pressures feel stronger than ever post-Covid pandemic, thanks to inflation, taxation and high interest rates.The city’s top professionals are sometimes known as HENRYs (High Earners, Not Rich Yet), suggesting wealth lies ahead. But now, it seems that might not be the case — which is prompting some to consider their options. Feeling the income squeeze?While lifestyle creep — the gradual increase in spending that accompanies pay rises — may be partly responsible, several bigger factors are at play. Thanks to property prices peaking and interest rates rising, many people now spend upwards of 40 per cent of their earnings on mortgage repayments.Recent graduates have paid out far higher tuition fees than earlier cohorts, and the debt is written off later. High interest can make it difficult to make a dent in student debt.So-called ‘stealth taxes’ are also at play. Frozen basic-rate and higher-rate tax thresholds have caused fiscal drag — when salary increases push more workers into higher tax brackets, so their pay rise doesn’t stretch as far.While they don’t get much sympathy for earning more, people with six-figure salaries can face two further issues: the 60 per cent tax trap, and the loss of childcare support.What is the UK 60 per cent tax trap?Getty ImagesOfficially, the highest rate of income tax in England is 45 per cent, which applies to income over £125,140. But many London HENRYs earn less and face a higher effective rate on part of their income: around 60 per cent.This is due to the personal allowance taper. While most people pay no tax on their first £12,570 of income, those who earn over £100,000 lose £1 of this allowance for every £2 of additional earnings. Of that, £2.80 goes to HMRC. With the reduced personal allowance, you lose another 40p. You now have just 80p left — and that’s before National Insurance and student loan deductions.The loss of childcare supportThat’s not the only penalty for high earners. Once earnings breach £100,000, individuals lose all access to the government’s two main affordable childcare schemes: tax-free childcare and free childcare hours. High-earning parents are left to pay nursery fees in full, which in London can reach upwards of £2,000 per month, per child — often far more than their excess earnings.How some high earners protect their childcare supportAccording to Trading 212’s chief operating officer George Mantilas: "Some high earners are bringing their adjusted net income (ANI) below £100,000 — reducing their effective tax rate and, in turn, requalifying for affordable childcare schemes." Your ANI is broadly the total of all your taxable income for the year, less trading losses, Gift Aid donations and gross pension contributions.So, some HENRYs are protecting more of their higher income by “paying a lump sum into a pension, such as a self-invested personal pension (SIPP)”, Mantilas adds. The benefits of a SIPP“A SIPP is like other pensions,” says Mantilas, “but with more control and flexibility.” You can pay in a lump sum, subject to annual pension allowance limitsYou’re entitled to HMRC tax relief at your highest marginal income tax rateYou can choose your own investment portfolio Investment growth is protected from tax. But always check your individual circumstances when withdrawingYou’ll usually have access to the money again at 55 (57 from 2028). It's a long-term commitment, so weigh it against your shorter-term needs. Cost of a SIPP contribution for high earnersGetty ImagesFor HENRYs, Mantilas says, “gross contributions to a SIPP can have a very low net cost”.For example, let’s say you earn £110,000. A gross pension contribution of £10,000 will help you restore your full personal allowance, reduce your effective tax rate, and still access childcare schemes. A gross contribution of £10,000 requires a payment of £8,000 (HMRC tax relief will top it up automatically). By reporting the contribution through your self-assessment, you should get back £2,000 in higher rate tax paid and £2,000 through the restoration of your personal allowance: £4,000 total.So, a £10,000 investment in your future costs just £4,000. “If you’re a parent, you could save significantly more than that on childcare,” Mantilas adds.Tax relief isn’t just for six-figure earners You don’t need to earn six figures to benefit from a SIPP. All higher-rate taxpayers are entitled to 40 per cent HMRC tax relief, so a £1,000 investment in your future could cost just £600.When investing, your capital is at risk, and you may get back less than invested. Past performance is no guarantee of future results. Make your money go further with Trading 212SIPP products will give you access to tax relief at your highest marginal rate. However, Trading 212 chief operating officer George Mantilas cautions: “Most SIPP providers charge monthly platform fees and investment commission. Over many years, those costs can be significant.” With Trading 212, you’ll pay no monthly platform fees and no commission on your investments. Other fees may apply. See terms and fees.That's why Trading 212 now has over five million lifetime funded accounts, globally. Download the app to see if it’s right for you.For more information, visit hereDisclaimer: Capital at risk. Past performance is no guarantee of future results. No investment advice. Do your own research. Self Invested Personal Pension (SIPP) access usually starts at 55 (57 from 2028). T212 SIPPs operated and administered by Platform One. Tax treatment depends on your individual circumstances and regulations which may change