Do not despair if you are one of the ‘striving’ workers revealed to be worst hit by the Chancellor’s Budget stealth tax raid.
The extended freeze on income tax rates until 2031 is going to drag millions more people into higher tax bands, but there are ways to protect your hard-earned money and slash your tax bill.
New analysis of Chancellor Rachel Reeves’s big tax-raising measure last autumn found workers earning £48,000 a year – police officers, senior teachers and nurses among them – will be stung for an extra £603.50 a year.
People with this income will be the biggest victims of the tax hike, paying even more than those on higher incomes.
People earning £46,000 a year will pay an extra £410.46 a year by the time the freeze ends in five years.
But meanwhile a top earner on £150,000 will pay only an extra £393.59, according to the Institute for Fiscal Studies.
Median gross annual wages for full-time employees were £39,039 in April 2025, according to official figures
The more of your income that is charged at a higher rate, the more tax you will pay
Median gross annual wages for full-time employees were £39,039 in April 2025, according to official figures.
So what are your options if you are set to be among the hard workers who are worst-hit – slightly ahead of the curve when it comes to pay, but by no means one of those with the ‘broadest shoulders’ in our country?
HOW TO CUT YOUR TAX BILL
The highest rate of income tax you pay will depend on your earnings and the tax band you fall into.
The official tax rates for England, Wales and Northern Ireland are 20 per cent, 40 per cent and 45 per cent. (Scotland has different rates of 19, 20, 21, 42, 45 and 48 per cent).
These are charged above the personal allowance of £12,570, which is the amount of income people can earn tax-free.
The more of your income that is charged at a higher rate, the more tax you will pay. So, to cut your bill, the key is to reduce the amount that you pay at higher rates where you can. Here’s how to do it…
Use salary sacrifice
This nifty scheme is invaluable to making it appear as if you earn less – thus reducing the amount you earn at a higher tax rate – but without cutting your income.
Contributions under popular salary-sacrifice schemes are going to be capped at £2,000 each year, but not until April 2029.
Therefore, if your employer offers one of these schemes it is still worth signing up.
The system allows workers to take a supposed pay cut, but that money goes into your pension instead (or you can use it towards other benefits such as childcare).
You don’t ‘lose’ the money, but as salaries are lower both staff and their employers save on National Insurance.
For example, if you earn just over £50,270 – which is the level that you start to pay 40 per cent income tax – you could salary sacrifice some of your earnings to get you below that threshold. That will mean none of your salary is taxed at 40 per cent, but you will not lose any income.
This scheme is particularly beneficial for taxpayers who would otherwise lose certain benefits when their salary exceeds a certain threshold.
For example, child benefit is tapered down when someone in a household earns between £60,000 and £80,000.
If a parent earns more than £60,000, they could use salary sacrifice to reduce their salary so that they do not lose eligibility for child benefit.
The personal allowance of £12,570 also starts to be tapered away if your salary is £100,000 and is gone entirely at £125,140. Workers in this position can use salary sacrifice to get their incomes below these thresholds so they hold on to more of their personal allowance.
Paying into a pension
Putting extra into your pension reduces your pay and therefore your tax burden. Of course, for many workers this is easier said than done as you may well need the cash now and cannot afford to stash it away in a pension where you can’t touch it until you reach the age of 55 (or 57 from 2028).
However, if you can afford to pay more into your pension it can keep you below income tax thresholds, and boost your retirement fund as well.
Paying in more gets you extra tax relief, which is a big incentive for paying into a pension. For example, pension savers get an uplift to money they pay in to take them back to the position before tax, turning every £80 into £100 if you are a basic-rate taxpayer.
Higher rate taxpayers only need to put in £60, while additional rate taxpayers pay in just £55 to get to £100.
If your employer ‘matches’ higher contributions you will get more free money from them too.
One tip is to increase pension payments every time you get a pay rise, using up at least some of the extra money before you have time to get used to spending it. Doing this is especially valuable if you are close to paying a higher rate of income tax.
Claim the marriage allowance
This is a handy perk for spouses and those in a civil partnership, if you are eligible. You can get up to £252 a year back, and you can backdate for the four previous years. See https://www.gov.uk/marriage-allowance
One partner must be a basic rate taxpayer, so on £50,270 or less a year, and the other earning less than the personal allowance, which is £12,570.
Marriage allowance lets you transfer £1,260 of your personal allowance to your husband, wife or civil partner. If both partners have no income other than their monthly wages, then the person who earns the least should make the claim. You can apply online at www.gov.uk/apply-marriage-allowance
Putting more into your pensions to stay below these thresholds allows you to carry on using the marriage allowance for longer.
