• April is the season of pay rises – however frozen tax bands mean more people pay higher rate tax each year
  • Standard Life shares top tips for managing the impact of 40% tax

April marks the start of the new tax year and, for many, the potential for a welcome pay rise. However, with income tax thresholds frozen until 2031, those who had been edging towards the top of the basic rate band may find a larger slice of their increase going straight to the taxman.

4.8 million more people are expected to be paying higher‑rate tax by 2031, compared with when the freeze began in 20221. Kicking in at the same time as April bill rises, the shift can come as an unwelcome shock, however the good news is that there are steps people can take to soften the impact and hold on to more of their hard‑earned pay.

Mike Ambery, Retirement Savings Director at Standard Life plc said: “A pay rise is usually welcome, but it can come as a shock when the increase in take‑home pay feels smaller than expected. That’s often because earnings tip more quickly into higher‑rate tax than people realise, especially while income tax thresholds remain frozen. With millions more people being pulled into higher‑rate tax through no real change in their circumstances, it’s never been more important to understand the tools available to protect your take‑home pay, while staying engaged with your financial future. Taking simple, practical steps can help ensure more of your money is working for you - both today and in the years ahead.”

Mike’s top tips if a pay rise has pushed you into higher‑rate tax band in the 2026/27 tax year:

1. Make the most of pension salary sacrifice - “One of the simplest and most effective ways to reduce the impact of moving into the 40% tax band is to increase your pension contributions - particularly through salary sacrifice, if your employer offers it. Because contributions are made from your gross salary, salary sacrifice can reduce the amount of income taxed at 40% and lower the National Insurance (NI) you pay, while boosting your pension in a tax‑efficient way. Some employers may also share part of their NI saving, further increasing contributions.

“For example, if someone earning £50,000 receives a £5,000 pay rise, taking their salary to £55,000, £4,730 of that increase sits above the higher‑rate tax threshold of £50,2702. Normally, that slice would be taxed at 40%, with NI also due - meaning £2,062 goes to HMRC, before other factors like student loans are considered. By paying the full £5,000 into a pension through salary sacrifice, they can avoid higher‑rate tax on that income, cut their NI bill, and have the entire £5,000 added to their pension before tax.

“It’s worth noting that the Government has set out plans for salary sacrifice rules to change from April 2029, with only the first £2,000 exempt from National Insurance – though there are no changes for now.

2. Check you’re getting the full pension tax relief you’re entitled to - “UK taxpayers can receive tax relief on pension contributions based on the rate of income tax they pay. Basic‑rate taxpayers receive a 20% government top‑up, meaning it costs £80 to put £100 into a pension. Higher‑rate taxpayers are entitled to an additional 20% tax relief, taking total relief to 40%, while additional‑rate taxpayers can claim a further 25%, bringing total relief to 45%.

“However, higher‑rate relief isn’t always applied automatically. Depending on how pension contributions are made, individuals may need to claim the extra relief from HMRC, either through Self Assessment or by contacting HMRC directly. Any relief due is usually repaid as a tax refund or applied through an updated tax code. It’s also worth noting that pension tax relief can generally be backdated for up to four tax years, so those who’ve missed out in the past may still be able to claim.

3. Watch out for your Personal Savings Allowance (PSA) - “Becoming a higher‑rate taxpayer also reduces how much interest you can earn tax‑free on savings held outside ISAs. Basic‑rate taxpayers can earn up to £1,000 of savings interest tax‑free, but this halves to £500 once you move into higher‑rate tax - and disappears altogether for additional‑rate taxpayers.

“With interest rates still high compared to the period between 2008 and 2022, it’s easier than many people expect to exceed that limit. Both Cash ISAs and Stocks and Shares ISAs allow money to grow free from tax within the annual ISA allowance of £20,000 a year. It’s also worth noting that the Government has announced plans to change how much can be paid into Cash ISAs from April 2027, with under-65s expected to be limited to £12,000 a year, even though the overall £20,000 ISA allowance will remain. Reviewing how savings are held can help protect returns and keep your money working harder.

4. Don’t overlook the marriage allowance cliff edge - “If you or your partner move into the higher‑rate tax band, you can no longer benefit from the Marriage Allowance, which could mean losing a tax saving worth up to £252 a year. This often catches couples out because a pay rise or bonus part‑way through the year can be enough to tip one partner into higher‑rate tax and remove your entitlement. In some cases, using salary sacrifice to reduce taxable income back below the higher‑rate threshold can help couples remain eligible, while also cutting tax and National Insurance and boosting pension savings at the same time.”

5. Keep an eye on Child Benefit and childcare support as income rises - “As earnings increase, families claiming Child Benefit should be mindful of how support is withdrawn through the High Income Child Benefit Charge (HICBC). This is based on an individual’s adjusted net income, not household income, so if one parent earns more than £60,000, Child Benefit starts to be clawed back. Adjusted net income is broadly your total income after deductions such as pension contributions and Gift Aid.

“For every £200 above £60,000, families repay 1% of their Child Benefit, with the benefit fully clawed back once income reaches £80,000. Income is also worth watching as it approaches £100,000, when access to Tax‑Free Childcare can be lost altogether. Pension contributions can play an important role here by reducing adjusted net income, helping families keep more support while also strengthening their long‑term savings – particularly if a bonus or further pay rise is expected.”

-- ENDS --

Notes to editors:

[1] Economic and fiscal outlook – November 2025 - Office for Budget Responsibility

[2] This applies to England, Wales and Northern Ireland – tax bands are different in Scotland.

 

About Standard Life

  • Standard Life is a retirement specialist focused entirely on retirement saving and income.
  • We are proud to manage around c£317bn in assets on behalf of our 12 million customers, and we champion the belief that everyone's journey to and through retirement can be better. 
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