A pay rise is traditionally seen as positive news. However, within the UK's increasingly intricate tax system, earning more can paradoxically leave individuals with less disposable income. Olly Cheng, financial planning lead at Rathbones, explains: "A new tax year typically offers a fresh start, but this year marks a notable escalation in so-called stealth taxes. Frozen thresholds are quietly pushing more people into higher tax brackets, meaning more households will pay increased tax, often without realising it."
Compounding the issue, benefit cut-offs create cliff edges where additional earnings not only trigger higher tax payments but also result in the loss of valuable support. Despite these challenges, turning down a pay rise is rarely advisable. With strategic financial planning, it is possible to retain more of your income and still benefit overall.
The Problem with Pay Rises
According to the Office for National Statistics, regular pay increased by 3.6% in the three months to February 2026, with total earnings including bonuses rising 3.8%. While wage growth appears positive, it increasingly draws more individuals into higher tax brackets due to fiscal drag. Tax thresholds have been frozen since 2021 and are set to remain unchanged until April 2031, meaning more workers face higher rates as their earnings rise.
Key Thresholds to Watch
Several income levels trigger higher taxes or loss of benefits. At £12,570, where income tax begins, the 0% starting rate for savings (up to £5,000 tax-free interest) starts to taper, and eligibility for the marriage allowance (up to £252 annually) ends for basic-rate taxpayers. Graduates begin repaying student loans when earnings reach £25,000 or £29,385, depending on the loan plan. At £50,270, workers enter the higher-rate (40%) tax band, with reduced savings allowances and increased investment taxes. The impact becomes more significant at £60,000, where child benefit begins to be withdrawn, potentially costing families over £2,200 per year. One of the steepest cliff edges occurs at £100,000, where individuals start losing their personal allowance and, for parents, access to childcare support. At £125,140, the personal allowance is entirely lost, and the additional rate of 45% income tax applies.
Why You Should Still Take the Pay Rise
Despite these pitfalls, declining a pay rise is seldom the optimal decision. Higher earnings improve long-term financial standing, particularly regarding pension contributions, career progression, and future salary negotiations. A higher salary can lead to larger percentage-based increases over time. For example, a 5% rise on £30,000 yields £1,250, resulting in a £31,500 salary; a subsequent 5% increase on that amount is £1,575, and so on. The key is not to avoid earning more, but to manage how that income is taxed. Many strategies that keep income below thresholds do not forfeit the value of a pay rise; they merely shift when you receive it.
Use Your Pension to Stay Below Thresholds
One of the most effective methods to mitigate the impact of moving into a higher tax band is through pension contributions. Laura Suter, director of personal finance at AJ Bell, notes: "Pensions are your ally in this situation, as paying into a pension can reduce your taxable income and bring you back below many thresholds, meaning you either pay lower tax rates or regain lost benefits." Crucially, contributing to a pension does not equate to losing money. Instead, you redirect part of your income to a tax-efficient vehicle where it can grow over time. While immediate access is limited, you are effectively paying your future self, benefiting from tax relief and potential investment gains. Many employers match pension contributions up to a certain level, effectively providing free money that compounds over decades.
Salary Sacrifice Can Help Too
Another way to manage taxable income is through salary sacrifice schemes offered by employers. These arrangements allow you to exchange part of your salary for benefits before tax is calculated, reducing your adjusted net income and potentially keeping you below tax band thresholds. Common salary sacrifice schemes include cycle-to-work programs, electric car leases, additional annual leave purchase, and certain health or wellbeing benefits.
Protect Your Investments with an ISA
Once you become a higher-rate taxpayer, your personal savings allowance drops from £1,000 to £500, and dividend tax rates increase. Basic-rate dividends are taxed at 10.75%, higher-rate at 35.75%, and additional-rate at 39.35%. The dividend tax-free allowance now stands at just £500 per year, down from £5,000 a decade ago. A straightforward way to reduce this tax burden is by using an Individual Savings Account (ISA), which allows you to save or invest up to £20,000 annually with returns free from income tax, dividend tax, and capital gains tax. Camilla Esmund, senior manager at interactive investor, adds: "For spouses and couples, you can utilise both £20,000 annual ISA allowances, providing a £40,000 allowance to work with." When investing, capital is at risk, and past performance does not guarantee future results.
