The impact of the cost-of-living crisis on higher earners – what you can do

Higher earners might feel more insulated from the cost-of-living crisis than those on lower incomes, but they might not be as secure as they think. An awful lot of higher earners will start to feel the squeeze as prices continue their ascent, and their debts are a particular worry. The more you earn, the less affordable your debts are now – and the worse they'll get over the next 12 months.

Our updated savings and resilience comparison tool, produced with Oxford Economics, looks at a number of areas of people's finances. While in many areas higher earners are more resilient than their lower paid counterparts, they're not completely untouched by the changes.

One of the areas it measures is how much money people have left at the end of the month. Unsurprisingly, the higher your income, the more likely you are to reach the resilience threshold – with more than nine in ten of the top 20% of earners having enough cash left over to be able to cope with life's nastier surprises.

However, in 12 months' time, this will fall to around half of the top 10% of earners, and around one in four of the next 10%. It means an awful lot of higher earners will start to feel the pinch. For many of them, it'll be the first time in a long time that they've had to tighten their belt.

This article is not personal advice, if you're unsure whether a course of action is right for you, ask for financial advice.

Debt problems

One of the most vulnerable areas for those on bigger incomes is debt. The barometer looks at how much of people's income is eaten up by debt repayments now, and how much of it is on a variable rate – making them vulnerable to future rate rises.

It also explores the level of arrears people face, the share of their debt that's used for capital consumption, and their own view of how much debt they have. All this is brought together to give them an overall debt resilience score out of 100.

And while higher earners score well for low levels of arrears, and the fact they're less likely to use debt for capital consumption, other areas are more concerning.

Already, the higher your income, the more of it you're spending on your debts, and the more of it you're likely to have on variable rates rather than more secure fixed ones. However, as we go through the next 12 months, our barometer forecasts that things could get worse more quickly for higher earners.

The overall score for the highest fifth of earners is set to drop 12% to 58.5. The score for the lowest fifth of earners drops just 3% to 75.4.

Part of the deterioration is down to the fact that the highest earners are more than twice as likely to have variable-rate debts as those earning less. So in an environment of rising rates and assuming their debts stay the same, their costs will increase.

Part of it might also come down to people borrowing to cover at least some of their rising costs.

When your income is higher, it's easier to feel relatively sheltered from wider economic pressures. The extra debt, and the higher repayments, feel more manageable because you've always tended to have the space in your budget to cover them. However, unless higher earners are also taking steps to cut costs and keep a lid on their borrowing, this is going to put their finances under increasing pressure as time goes on.

Those with bigger incomes might think they can take the pressure. But as we head deeper into tougher economic times, there are no guarantees that life will continue as we expect. With higher and more variable-rate borrowing, bigger earners are particularly vulnerable if they lose their income for a period.

Already, higher earners are more likely to feel they have taken on more debt than they should have than any other income group. And for some of them, this sense of foreboding will prove right.

What can you do?

The good news is that higher earners tend to have more room to manoeuvre. Some spending on nice-to-haves is relatively easy to cut, including holidays, eating out or going out with friends.

We found that fewer higher-rate taxpayers gave up eating out during the pandemic, and of those who did, fewer of them stuck with it. Likewise, they cut back on shopping less, and were half as likely to have stuck with it. It means they have room to make these cuts.

Higher earners might not have made these changes yet. Our research shows fewer have started to shop around more or cut out luxuries. So if you're starting to feel the pinch, it's essential to do this sooner rather than later.

When you've enjoyed more expensive habits for a long time, it can be difficult to make a change. It's easy to get so used to them, that things like a holiday or meal out can start to feel like essentials. It means taking a step back and consider carefully which of these things you can realistically live without – at least for the short term.

Read more: The cost-of-living crisis – what is it and how to cope