Will you pay more tax this year and what can you do?

No big tax hikes were announced in the recent Spring Statement, but don’t be fooled.

Millions of us are paying more tax, with income tax receipts set to climb from £260.3bn this year to £310bn in 2027/28 – and it’s not just because us Brits are earning more, but rather the effects of fiscal drag.

The government’s stealth tax grab is in full swing.

Thanks to frozen income tax thresholds, even a modest pay rise could tip you into a higher tax band, meaning you’ll hand over an even bigger slice of your hard-earned cash to the taxman.

In fact, just hours after Rachel Reeves’ Spring Statement, rumours were already circling that an extension could be on the cards in the Autumn Budget.

So, if you want to keep more of what you earn, what can you do now to pay less tax?

With a few tax-smart moves, you can shrink your tax bill, and in turn boost your savings – here’s how.

This article isn’t personal advice. Rules can change, and benefits depend on your circumstances. Investments rise and fall in value, so you could get back less than you invest. If you’re not sure what is right for you, ask for financial advice. Tax rates and bands differ for Scottish taxpayers.

Remember, you can pay up to your earnings (or £3,600, if lower) into a pension and receive tax relief, although this is limited by the annual allowance which is £60,000 for most people.

You can normally access your pension from age 55 (rising to 57 in 2028) when 25% can be taken tax-free and the rest taxed as income.

The hidden cost of a pay rise

Wages rising while tax bands stay the same mean more and more people are being quietly pulled into higher tax brackets – many unknowingly.

The personal allowance (£12,570) – the amount we can earn before paying tax – and the higher-rate threshold (£50,270) have been frozen at 2021/22 levels.

If they had kept up with inflation, they’d now stand at around £15,280 and £61,120 – meaning far fewer people would be dragged into higher tax.

For example, take Maya earning £48,000. She gets a £4,000 pay bump, but now, with her total income at £52,000 she’s classed as a higher-rate taxpayer. This means she will suddenly find herself paying 40% tax on the top £1,730 of her earnings above the £50,270 threshold.

Your tax band doesn’t just determine how much income tax you’ll pay, it affects lots of things, including certain benefits and investment taxes.

What can you do?

Contributing to your pension, like an HL Self-Invested Personal Pension, can reduce your total taxable income, cut your overall tax bill, while boosting your later life savings at the same time.

If you’re in line for a promotion, or expecting a pay rise, take the time to crunch the numbers – if it pushes you into a higher tax band, your pension can help you take back control.

Maya can turn the tax tables by making sure she contributes £2,000 to her pension this tax year, with a net payment (income after tax) of £1,600.

Thanks to tax relief, this costs her just £1,254, as there’s a £400 basic-rate tax (20%) top up from the government.

Plus, as a 40% taxpayer for the income above £50,270, Maya can claim a further £346 via her tax return. Please note, you can’t claim more higher-rate tax relief than the tax you’ve paid at that rate.

If Maya was contributing 5% (£216.67) each month to her workplace pension after being auto-enrolled, these payments would help lower her total taxable income in the same way.

Importantly, it also pulls her taxable income back below the 40% threshold.

Remaining a basic-rate taxpayer will mean she benefits from paying less tax on savings and investments outside of ISAs and pensions. Maya’s pension grows and her tax bill shrinks.

High earner? – Beware of the 60% tax trap

For those with income between £100,000 - £125,140, there’s an effective 60% tax rate.

That’s because for every £2 of income over £100,000, you lose £1 of your tax-free personal allowance.

Typically, for every £1 that falls into this punishing tax bracket, you’ll take home 38p – after paying 60% income tax (effective rate), plus 2% National Insurance.

What can you do?

Again, contributing to your pension can help you sidestep this tax trap. And for every £100 in this income bracket that goes into your pension, it could cost you just £40 – or as little as £38 if your employer offers salary sacrifice, enabling you to save both the income tax and National Insurance.

Pension providers will automatically reclaim 20% basic-rate tax relief, but if you pay tax at a higher rate you will need to reclaim up to an extra 20 or 25% from HMRC via your tax return.

This usually comes back as a refund at the end of the tax year, or in the form of a lower tax bill, and won’t be added to your pension.

Working parent? – Watch out for the child benefit tax sting

If either parent in a household has income over £60,000, child benefit entitlement decreases by 1% for every £200 above this threshold.

And as soon as it hits £80,000, it’s gone completely.

With child benefit worth up to £1,354.60 for the eldest/only child annually in 2025/26 (up to £897 for other children) – this offers a valuable extra income stream for working families.

What can you do?

Again, pensions can come to the rescue as making contributions can lower your total taxable income, helping you to keep some or all of the child benefit cash in your family’s pocket.

For example, Steve and his wife Lucy have one child, Steve has the higher income in his household totalling £68,000, this puts him £8,000 over the child benefit threshold – costing him 40% of his benefit (approx. £541).

By putting £8,000 into his pension, he keeps 100% of the child benefit (£1,354.60) and supercharges his retirement pot. Tax relief means that Steve’s £8,000 pension contribution only effectively costs him £4,259 – a win-win for now and the future.

It’s not just income you’re paying more tax on

Changes to the personal savings allowance, higher capital gains tax (CGT) and increased dividend tax rates in recent years, means more of the cash from investments and their growth could end up in HMRC’s hands.

The CGT allowance has been halved and halved again, it now stands at just £3,000. Meanwhile CGT tax rates have also gone up (for non-residential property assets) – to 18% for basic-rate taxpayers and 24% for higher-rate taxpayers – leaving many investments outside of ISAs and pensions exposed.

And personal savings allowance has been frozen too. Outside of any personal savings allowance (£1,000 for basic rate, £500 higher rate, and £0 for additional-rate taxpayers), interest on savings is taxed at the same rate as earned income.

And if your income is above £125,140, you’ll pay a hefty 45% on every pound of cash interest you earn if it’s held outside an ISA or pension.

What can you do?

Money held in ISAs is free from UK income and capital gains taxes. While ISAs (other than the Lifetime ISA) don’t offer a tax benefit on the way in, you can withdraw money at any age, completely tax free.

Every tax year you get an annual ISA allowance – it’s £20,000 for this tax year. But it’s a use it or lose it deal as the allowance resets each tax year.

ISAs, like the HL Cash ISA, can also help shelter you from paying tax on interest from savings.

Cash can be useful for short-term goals and ‘rainy day’ savings, however over the longer term, cash can struggle to keep up with inflation. Investing for at least five years increases your chances of positive returns compared to cash savings, but you can get back less than you invest.

Now is the time to take action and keep more of your hard-earned money working for you – there’s still time to use your all-important tax-free allowances before the end of the tax year on 5 April.

And both ISA and pension allowances will renew in full on 6 April.

Plus, by using your ISA and pension allowances, you could qualify for our cashback and prize draw offers. Terms apply.