Millions set to pay more tax - 7 ways to cut your bill on your income and pensions

Half a million more people will be dragged into the higher rate tax bracket over the next year, with millions more set to pay even more. 

Back in the day, the 45% tax bracket was seen as only affecting the super high earners. However, over 1.23 million people are now paying the top rate on their incomes, according to HMRC figures.  

There are set to be 8.3million people in the higher or additional rate tax brackets - a 45% rise since the tax thresholds were frozen back in 2021. Alongside this, it is expected that 400,000 people will start paying tax on their income, including 420,000 pensioners. 

With thresholds set to stay frozen until 2028, even more people will be impacted by the so-called 'stealth tax'. 

Here Which? dives into the reason behind the staggering rise, and shares a few ways you could cut your tax bill - both on earnings and on pensions. 

How many more people are paying tax? - and why?

HMRC estimates that there will be around 39.1 million taxpayers by the end of this tax year, an increase of under five million from the 2022-23 figure of 34.5million.

Of this:

• 30.8 million are basic rate taxpayers (up from 30.4 million in 2022-23)
• 7.08 million are higher rate taxpayers (up from 5.1 million in 2022-23)
• 1.23 million are additional rate taxpayers (up from 570,000 in 2022-23)

As mentioned above, the tax thresholds have been frozen since 2021. Before the freeze, they would rise by the rate of inflation each year. 

This freeze is set to come to an end in the 2028-29 tax year.This measure is known as ‘fiscal drag’ as the frozen tax bands do not keep up with inflation, meaning more is spent on tax as incomes rise. 

The financial policy is coined as a 'stealth tax' and is a way governments can gain more through taxation, without actually raising taxes.

Laura Suter, director of personal finance at AJ Bell, said: 'The figures published show that in just the past year alone, a further half a million people are estimated to move into the higher rate taxpayer bracket. They now account for almost a fifth (18.1% in 2025-26) of all taxpayers, illustrating that the higher rate of tax, once reserved for those on healthy salaries, is now pretty commonplace.'

• Find out more: income tax calculator

When do you start paying tax?

Under UK tax law, each person has a Personal Tax Allowance. This is the amount of income you can earn/get every year without having to pay tax on it. 

Currently, this sits at £12,570. If your annual income is below this level, then you will pay no tax. If it's over, you will pay tax on the amount above the threshold. 

The thresholds in England, Wales and Northern Ireland are the following:

• Personal Allowance: Up to £12,570 (Paying a tax rate of 0%)
• Basic rate: Between £12,571 to £50,270 (Paying a tax rate of 20%)
• Higher rate: Between £50,271 to £125,140 (Paying a tax rate of 40%)
• Additional rate: Over £125,140 (Paying a tax rate of 45% with no Personal Tax Allowance)

 It’s important to note that Scotland has different tax thresholds from the rest of the UK. 

• Find out more: pension tax calculator

More pensioners paying tax

The release revealed that 420,0000 more pensioners will be paying tax on their retirement savings by the end of this tax year. There are set to be 8.7million taxpayers in the UK aged over 65, which is almost double the 4.9 million in 2010-2011.

This is because the Personal Tax Allowance covers all income you have, including the state pension and any private pensions. 

In the current tax year, the annual amount for the new state pension sits at £11,973 if you receive the full amount. For the basic state pension, it sits at £9,175.40 per year. 

If you claim the new state pension, you only have £597 left before having to pay tax which means any extra income you receive such as private or workplace pensions, investment income, or rental income, would tip you over the edge. 

Four ways to lower your tax bill

It is against the law not to pay your share of tax in the UK, but there are ways you can reduce it - even by a little bit. 

1. Top up your pension payments

Topping up your monthly pension payments is a simple way of cutting your tax bill, and you can do this with a workplace pension, or with a private one. 

If you are a basic rate taxpayer, you get 20% tax relief on the money you put into the pension pot. So if you put in £100, you will actually only cost you £80. The relief is claimed automatically by your pension provider and added to your pension pot. 

If you are a higher or additional rate taxpayer, you can claim 40% and 45% respectively. Your pension provider will claim 20% for you, but you will need to claim the other 20% or 25% through a self-assessment tax return. 

This means a £100 contribution into your pension will only cost you £60, as your pension provider has claimed £20 in tax relief and you’ve claimed another £20 back. 

If you can afford to put  top up your pension you can bring down your take

By funnelling money into pensions, you can bring your income back down below this level and not be hit by the higher tax.

• Find out more: tax reliefs – how to reduce your tax bill

2. Share your Personal Allowance

Marriage tax allowance allows eligible couples to transfer £1,260 of their Personal Allowance to their spouse or civil partner. One of you needs to be a non-taxpayer while the other person needs to be paying the basic 20% rate of tax. You cannot be eligible if you are a higher or additional-rate taxpayer.

A successful claim will see the higher earner pay slightly less tax on their take-home pay, and for the 2025-26 tax year marriage tax allowance is worth £252.

You can also claim back for the last four tax years if you met the eligibility criteria, so you could receive a free cash payment worth over £1,000 from HMRC. Once you’ve put in the claim, it’ll count for tax years going forward as long as you still meet the eligibility criteria.

• Find out more: tax on savings interest and investment income

3. Claim tax back on your work uniform 

HMRC allows workers to claim back 'work-related expenses' each tax year, and usually, this consists of things you have to pay for for your job, which can include uniforms, tools, travel and working from home costs.

With uniforms, workers can claim tax relief not just on the uniform itself but also on the expenses of washing, repairing or even replacing the clothing. It also doesn't need to be anything specific, you can even claim the money if you just wear a branded company T-shirt.

The flat rate standard allowance for uniform maintenance sits at £60, and the allowance will give you back the amount of tax you would otherwise have paid on that £60. This works out at:

• £12 for a basic rate taxpayer
• £24 for a higher rate taxpayer 

Certain professions, such as nurses, police officers, and paramedics, have different allowances and can claim more. Once you have claimed, it should remain in place for future tax years. 

• Find out more: tax-deductible expenses

3. Take advantage of dividend allowances 

If you are self-employed and own a limited company, you can pay yourself with a salary or take an income in the form of dividends - or a mixture of both.

Dividends are a share of the profits which are paid to business shareholders as a return on their investment. The annual dividend tax allowance for the 2025/26 tax year is £500, so you pay tax on dividends exceeding this amount. 

However, as there is no national insurance on investment income, it’s usually a more tax efficient way to extract money from your business, rather than taking a salary. They also have a lower rate of income tax compared to a salary.

Rates are: 

• Basic rate: 8.75% – income up to £50,2703
• Higher rate: 3.75% – income from £50,271 up to £125,140
• Additional rate: 39.35% – income above £125,140

However, unlike salaries, the business must be making a profit after tax to pay them. Plus they don’t count as ‘relevant UK earnings’ for tax relief on pension contributions that you make yourself.

Also, if you don't receive a salary payment which matches or exceeds the lower earnings limit, you will not obtain a qualifying year for National Insurance purposes. This could then impact the amount of state pension you receive. 

• Find out more: dividend tax explained

Three ways to reduce tax on pensions 

There are some ways you can reduce the amount of tax you pay. Don’t worry, these are all legal and above board, and can be easily implemented yourself. 

1. Withdraw your pension cash gradually

You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum when you first access it. The most you can take is £268,275, and anything above this will be taxed as income. 

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown says pensioners do not need to take this all at once. Pensioners should instead check whether their provider offers phased drawdown, which lets you take this portion of your pension in chunks spread over time. This can be used alongside any taxable income to keep you below an income tax threshold. 

She added: ‘This can be a good option if you are continuing to work part time for instance and need to take a bit of income from your pension. It can also be very useful for those who wish to continue to contribute to their pension because they haven’t accessed the taxable portion of their pension so they haven’t triggered the money purchase annual allowance which restricts your annual allowance to £10,000 per year.’

• Find out more: best pension drawdown providers 2025

2. Utilise cash ISAs  

Using a Cash ISA alongside your pension is also a ‘great’ way to keep your tax bills down. Particularly those with larger pension pots. You can put up to £20,000 in a cash and/or stocks and shares ISA and any income generated can grow completely tax-free, protecting your savings now and in the future.

Savers can currently open and pay into multiple ISAs of the same type each year. You can also withdraw money from ISAs anytime tax-free, if you want to supplement your other income without paying any tax.

Helen explained: ‘As income from an ISA can be taken tax free, you can combine this with your taxable income from a pension to keep your income tax bill low. ‘It may even be the difference between you crossing the threshold into paying a higher rate of tax.’

It has been reported that Chancellor Rachel Reeves will be cutting the cash ISA limit from £20,000 a year to as low as £4,000. Although this has yet to be confirmed, if this goes ahead, this would cut the amount of your pension you can invest into an ISA. 

• Find out more: best cash ISA rates 2025

3. Take advantage of savings allowances 

If you are not keen on a cash ISA, savings allowances can help you cut back the tax on your pensions. Currently, you can earn up to £1,000 in savings interest a year without having to pay tax on it if you are a basic-rate taxpayer through the Personal Savings Allowance. 

This reduces to £500 for higher rate taxpayers, and additional rate taxpayers do not have one. This means they have to pay tax on all interest earned on savings. So holding money in a savings account can allow you to access your pension savings more easily, plus earn a little extra - without having to pay tax on it. 

Those on low incomes can also access the government’s special ‘starter rate’ for savings, which allows them to earn interest up to £5,000 without paying tax.  Every £1 of other income (for example, your pension) above your personal allowance reduces your starting rate for savings by £1.

When allowances sit on top of each other, such as:

• Personal Allowance: £12,570
• Starter Savings Rate: £5,000
• Personal Savings Allowance: £1,000

You can get £18,570 before having to pay any tax on savings interest.

• Find out more: best savings accounts 2025