The Rise in UK Tax Bills and How to Reduce Your Tax Legally

Published by Nida Umair posted in Tax Planning, Tax Services on 8 January 2026

With income‑tax thresholds frozen until April 2031, millions of people will pay more tax even if rates stay the same. These changes are being called fiscal drag or a “stealth tax” because earnings rise with inflation, but tax bands do not. As wages and pensions grow, more people cross these thresholds and face a rise in UK tax bills.

Chancellor Rachel Reeves extended the freeze in her November 2025 Budget so that income tax and National Insurance bands will not rise until 2030–31. At the same time, she cut the additional rate threshold to £125,140 and increased the dividend, property, and savings tax rates by two percentage points. The Office for Budget Responsibility (OBR) estimates that about five million extra people will be pulled into higher tax bands by 2031.

This guide looks at all tax bills that are rising in 2026 and beyond and sets out legal ways to pay less tax. Apex Accountants encourage readers to plan early and seek professional advice – the rules are complex and subject to change.

Why are UK tax bills rising until 2031?

Thresholds frozen until 2031

Personal allowances (£12,570), the higher‑rate threshold (£50,270) and the additional‑rate threshold (£125,140) are frozen until April 203. Because wages and pensions usually rise each year, more of your income falls into the higher bands – this is known as fiscal drag.

Dividend tax increase

From April 2026 on, the basic rate of tax on dividends will rise from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%; the additional rate stays at 39.35%. A Reuters report confirms that this two-percentage-point increase affects savings, property, and dividend income.

Dividend and capital‑gains allowances cut

The tax‑free dividend allowance fell from £2,000 in 2022/23 to £1,000 in 2023/24 and £500 in 2024/25. The capital gains tax (CGT) annual exempt amount is £3,000 from April 2025.

ISA changes

The overall ISA allowance remains £20,000, but from April 2027 on, adults under 65 will only be allowed to put £12,000 in cash ISAs; the rest must be invested in stocks and shares. Junior ISAs continue to allow £9,000 per child.

Find out: How new ISA rules influence financial security

Savings tax rise in 2027

The personal savings allowance remains £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and zero for additional rate taxpayers. However, from the 2027/28 tax year, the tax on interest outside an ISA will rise by two percentage points: the basic rate will increase to 22%, the higher rate to 42% and the additional rate to 47%.

Salary sacrifice limit

From April 2029 only the first £2,000 of salary‑sacrificed pension contributions each year will be exempt from National Insurance contributions. Contributions above this will be subject to employer and employee NICs.

High Income Child Benefit Charge

The threshold at which child benefit is clawed back increased to £60,000 for tax years from 2024/25 onwards. Families with adjusted net incomes above £60,000 will pay back some or all of the benefit.

All Tax Bills That Are Rising In 2026 and Beyond

Change	Details	Why it matters
Dividend tax increase (Apr 2026)	The basic dividend tax rate will increase to 10.75%, while the higher rate will rise to 35.75%; the additional rate will remain at 39.35%. The tax‑free dividend allowance stays at £500.	Investors with shares or company owners taking dividends will pay more on their income than the allowance. Consider holding dividend‑paying investments within ISAs or pensions to avoid the tax.
Income‑tax thresholds frozen until 2031	The personal allowance (£12,570), higher‑rate threshold (£50,271–£125,140) and additional‑rate threshold (£125,140+) will not rise.	Wage growth pushes more of your income into higher tax bands. A worker earning £50,000 in 2026 could pay thousands more in tax by 2031.
Cash ISA cap (Apr 2027)	Under‑65s will be limited to £12,000 in cash ISAs each year; they can still invest up to £20,000 in total across all ISA types.	Savers who favour cash must plan to invest the remaining £8,000 in stocks and shares ISAs or lose the allowance.
Savings tax rise (2027/28)	The basic‑rate tax on savings interest outside an ISA will rise from 20% to 22%; the higher rate from 40% to 42%; and the additional rate from 45% to 47%.	More savers will pay tax on interest; using ISAs or holding savings in the lower‑earning spouse’s name becomes important.
Salary sacrifice cap (Apr 2029)	Only the first £2,000 of salary‑sacrificed pension contributions each year will be exempt from National Insurance.	High-earners using salary sacrifices to boost pensions should maximise contributions before 2029 or explore alternative benefits, like electric car schemes.
High Income Child Benefit Charge	Child benefit starts to be withdrawn once the higher earner’s income exceeds £60,000 from 2024/25 onwards.	Families approaching £60,000 may want to use pension contributions or charitable giving to reduce their adjusted net income and keep the benefit.
Capital Gains Tax rates	For 2025/26 and later, basic‑rate taxpayers pay 18% on gains; higher‑ and additional‑rate taxpayers pay 24%.	Selling assets outside tax wrappers can trigger higher CGT bills; using ISAs, pensions and the £3,000 allowance helps.
Inheritance tax thresholds are frozen.	The nil‑rate band remains £325,000 and the residence nil‑rate band £175,000 until 2030/31. Any unused allowances are transferable between spouses or civil partners.	Rising house prices mean more estates will pay 40% tax on amounts above these thresholds; gifting assets and using pensions can reduce liability.

Practical Example of The Rise In UK Tax Bills

Someone earning £35,000 in 2020 would have paid tax mostly at the basic rate. By 2031, if their salary rises to £45,000 through normal pay increases, a much larger portion of their income is taxed, even though tax rates have not changed. Because the personal allowance remains frozen at £12,570, more of their earnings fall into taxable bands each year.

Over the freeze period, this worker pays several thousand pounds more in income tax than they would have if allowances had risen with inflation. This increase happens without any official tax rise, purely due to frozen thresholds.

Practical and Legal Ways To Pay Less Tax in 2026

Increase your pension contributions

Pension contributions attract tax relief and reduce your taxable income. A basic‑rate taxpayer contributing £10,000 receives a 20% government top‑up, while a higher‑rate taxpayer can claim an extra 20% through their tax return. For high earners near £100,000, extra contributions can bring your income below the threshold where the personal allowance tapers away.

Use salary‑sacrifice schemes before 2029

Swapping part of your salary for pension contributions or benefits such as electric cars or cycle‑to‑work schemes reduces both income tax and NICs. From April 2029 on, the NIC-free amount is limited to £2,000, so consider boosting your contributions before then or exploring other benefits.

Claim the marriage allowance

If one spouse earns below the personal allowance (£12,570) and the other is a basic‑rate taxpayer, the lower earner can transfer £1,260 of unused allowance to the higher earner, saving up to £252 a year.

Use your ISA allowance and plan for the cash cap

Invest up to £20,000 each year in ISAs – interest, dividends and gains are tax-free. Under‑65s should plan to use more of the stocks and shares ISA allowance from April 2027 because cash ISAs will be limited to £12,000. Consider splitting savings across cash and investment accounts to maintain flexibility.

Optimise your personal savings allowance

Hold savings in the name of the lower‑earning partner to use the larger personal savings allowance (up to £1,000 for basic‑rate taxpayers). For higher-rate taxpayers, the allowance drops to £500 and disappears entirely once their income exceeds £125,140.

Manage capital gains and dividends

Realise gains up to £3,000 each tax year to use the CGT allowance.
Offset gains with capital losses, which can be carried forward indefinitely.
Transfer assets to a spouse in a lower tax band to use their allowances and lower CGT and dividend tax rates.
Hold dividend‑paying assets in ISAs or pensions to avoid the higher rates that come into effect in April 2026.

Make charitable donations (Gift Aid)

Donations to charity through Gift Aid allow charities to claim 25p for every £1 you donate. Higher‑rate taxpayers can reclaim the difference between their rate and the basic rate via self‑assessment. Gift Aid donations also increase your basic‑rate tax band, meaning more of your income is taxed at 20% instead of 40%.

Plan around the High Income Child Benefit Charge

If your adjusted net income is approaching £60,000, pension contributions or Gift Aid donations can reduce your income and preserve child benefit. You can also elect for your partner to receive the benefit and pay the charge through their tax return.

Use inheritance‑tax allowances and gifting

Give away up to £3,000 per year, make small gifts and use trusts or pensions to pass wealth outside your estate. Combine the nil‑rate band and residence nil‑rate band to pass up to £1 million tax‑free.

How We Can Help You Plan Better Amid Rising UK Tax Bills

Apex Accountants is a full‑service firm offering tailored advice to individuals and businesses. Our tax specialists can help you:

Personal tax planning:

We review your income, allowances, and relief to structure your finances efficiently, prepare your self-assessment return, and advise on pension and ISA strategies.

Inheritance‑tax and estate planning:

We create gifting strategies, establish trusts, and guarantee the tax-efficient structuring of wills and life insurance policies. Our goal is to protect your wealth for future generations.

Business and corporation‑tax advice:

Our guidance helps companies claim all allowable expenses, such as capital allowances and R&D relief. We also provide advice on salary-sacrifice arrangements, shareholder remuneration, and restructuring benefits for directors.

Payroll and salary sacrifice:

Our payroll team implements salary‑sacrifice schemes and monitors National Insurance changes. We will help you maximise your NIC savings before the £2,000 cap takes effect.

Investment and pension planning:

Working with regulated financial advisers, we can help you align your investments, pensions and ISAs with your long‑term goals and minimise tax on dividends and capital gains.

Compliance and reporting:

We ensure your business or personal affairs comply with HMRC rules, including the new quarterly reporting requirements and Making Tax Digital obligations.

Conclusion

The tax landscape in the UK is shifting. Frozen income‑tax thresholds until 2031, rising dividend and savings taxes, cuts to allowances and new caps on salary‑sacrifice relief will gradually increase the tax burden on workers, investors and families. Nevertheless, there are many legal tools to reduce your bill: boosting pension contributions, using ISAs and personal allowances, claiming the marriage allowance, gifting assets and donating through Gift Aid can all make a meaningful difference. Understanding fiscal drag and planning around key thresholds – such as £50,271, £100,000 and £60,000 – is essential.

At Apex Accountants, we combine our deep knowledge of UK tax law with personal advice. You can secure your financial future and keep more of your money by taking action early and using your allowances annually. Contact us today to discuss how we can help you navigate the 2026 tax changes and beyond.

FAQs About UK Tax Rise

1. Are taxes increasing in the UK?

Tax rates have not risen widely, but frozen income tax thresholds mean more people pay higher tax as wages increase. This effect, known as fiscal drag, raises tax bills.

2. How can I reduce my income tax bill with thresholds frozen?

You can reduce income tax by increasing pension contributions, using salary sacrifice, claiming marriage allowance, checking your tax code, and keeping taxable income below higher tax bands.

3. How to avoid the 60% tax trap in the UK?

The 60% tax trap affects incomes between £100,000 and £125,140. Pension contributions, Gift Aid donations, and salary sacrifice can reduce adjusted income and preserve your personal allowance.

4. What salary pays 40% tax in the UK?

The higher rate of income tax applies once taxable income exceeds £50,271. Earnings above this level are taxed at 40% until reaching the additional rate threshold.

5. Is the UK the highest-taxed country in Europe?

The UK is not the highest-taxed country in Europe. Several EU nations have higher overall tax burdens, but frozen thresholds mean UK workers face rising effective tax rates.

6. What are the best uses of my ISA allowance?

ISAs protect savings, dividends, and investment gains from tax. Using the full £20,000 allowance helps shield income, especially as dividend and savings taxes continue rising.

7. How do I minimise dividend and investment taxes?

Holding investments inside ISAs or pensions avoids dividend and capital gains tax. Using annual allowances, spreading asset sales, and transferring assets to a lower-earning spouse can also reduce tax.

8. What is fiscal drag, and why does it matter?

Fiscal drag happens when tax thresholds stay frozen while incomes rise. It quietly pushes people into higher tax bands, reducing take-home pay without any official tax rate increase.

9. How does frozen tax affect child benefit?

If adjusted income exceeds £60,000, Child Benefit is gradually withdrawn. Pension contributions and Gift Aid donations can reduce adjusted income and help retain some or all benefits.

10. How can I reduce inheritance tax liability?

You can reduce inheritance tax through annual gifting allowances, seven-year gifting rules, residence nil-rate bands, and life insurance written in trust. Early planning makes the biggest difference.