As wages rise while tax thresholds remain frozen, millions are being pulled into higher tax brackets. However, there are legal ways to reduce your tax bill ahead of the Budget on October 28.
The personal allowance—the amount you can earn before paying income tax—is currently set at £12,570 a year, a level frozen since 2021. Previously, thresholds rose with inflation, but they are now set to remain unchanged until 2031. This freeze, known as fiscal drag or a stealth tax, means rising wages can push people into paying tax or higher rates without the government actually increasing tax rates.
In a recent poll, almost half of Mirror readers voted for unfreezing tax thresholds as the help they most wanted announced in the Budget.
Understanding the tax bands
You pay 0% income tax on earnings up to the personal allowance of £12,570. Earnings between £12,570 and £50,270 are taxed at the basic 20% rate. The higher 40% rate applies to earnings between £50,270 and £125,140, while the additional 45% rate kicks in above £125,140.
- Personal allowance - up to £12,570
- Basic rate (taxed at 20%) - £12,571 to £50,270
- Higher rate (taxed at 40%) - £50,271 to £125,140
- Additional rate (taxed at 45%) - over £125,140
Salary sacrifice and pension contributions
If your employer runs a salary sacrifice scheme, you could give up part of your salary in exchange for a non-cash benefit, such as pension contributions or childcare vouchers. This reduces your pre-tax salary, meaning less of your income is subject to tax. In some cases, take-home pay might actually increase because you pay less tax, though a lower salary on paper could affect your ability to borrow for a mortgage or credit card.
Pension salary sacrifice schemes will become less generous from 2029, with only the first £2,000 free of employer and employee National Insurance. You can pay up to £60,000 into a pension in the current tax year.
You also benefit from government tax relief on pension contributions. As a 20% basic rate taxpayer, for every £80 you put into a pension, the government adds £20, making a total contribution of £100. Tax relief can be applied in two ways: if contributions are deducted from salary before income tax is calculated, you receive relief immediately; if taken after tax, your pension provider automatically claims relief from HMRC and adds it to your pot.
Marriage tax allowance and ISAs
If you are married or in a civil partnership, you may be able to transfer £1,260 of your personal allowance to your spouse to reduce their tax. This cuts their tax by up to £252 in the current tax year, and claims can be backdated by four tax years. To qualify, one partner must be a non-taxpayer and the other must pay the basic 20% rate.
Finally, consider using an ISA to protect your savings, especially if you are near the threshold for paying tax on savings interest. You can pay up to £20,000 a year across ISA accounts. Basic 20% rate taxpayers can earn up to £1,000 in savings interest each tax year before paying tax, while higher rate taxpayers can earn up to £500. Additional rate taxpayers receive no allowance.
