Reduce your Tax Liability before the end of the Tax Year
Why More People Are Paying 40% Tax, and How to Avoid the Costly Traps
Higher‑rate taxpayers are being hit harder than ever as frozen thresholds collide with rising wages. Millions of people who would never have expected to pay 40% tax have been dragged into the higher‑rate band since 2021, and the impact goes far beyond Income Tax alone.
The growing reach of higher‑rate tax –
The higher‑rate Income Tax threshold has been frozen since 2021–22. In that time, the number of people paying 40% tax has surged to 7.08 million – an increase of 2.65 million in just five years. With average salaries rising by around 29% over the same period, the threshold would now sit at £64,848 if it had kept pace with wage growth.
Instead, it remains stuck, pulling more earners into the higher‑rate band each year.
The hidden impact of frozen thresholds
It’s not just Income Tax that bites when you cross into the 40% bracket. Several other thresholds have failed to keep up with inflation or have been cut outright creating a series of stealth tax traps:
- Dividend Tax: the tax‑free allowance has been slashed, meaning more of your investment income is taxed, and at a higher rate once you’re a 40% payer.
- Capital Gains Tax (CGT): the annual exemption has been dramatically reduced, so more people face CGT on the sale of assets.
- Savings Tax: your Personal Savings Allowance is halved the moment you become a higher‑rate taxpayer, meaning more of your interest becomes taxable.
Why pay rises don’t feel like good news
A pay rise should feel like progress. However for many people, recent increases have come with an unpleasant surprise: crossing a tax threshold that triggers higher rates across multiple parts of the tax system.
In addition, before you even get close to the additional‑rate threshold, other tax traps start to appear—quietly eroding the value of your income growth.
The Tax Crackdown –
Income Tax on earnings
The higher rate tax threshold has been frozen at £50,270 from April 2021 to April 2031, and the Income Tax rate rises from 20% to 40% once you cross the threshold.
Losing the Personal Allowance
Once you earn £100,000, your personal allowance of £12,570 is cut by £1 for every £2 for adjusted net income above this level until your allowance is zero once you earn £125,140. This is an effective tax rate of 60%.
This threshold has not moved since it was introduced in April 2010. Over that time, wages have risen 68%, so to keep pace with wages it would have had to rise to £168,000.
High Income Child Benefit Charge (HICBC)
The High Income Child Benefit Charge (HICBC) kicks in at £60,000. If your income (or your partner’s) has pushed over the threshold, and you receive child benefit, you will need to repay at least some of it through self-assessment tax returns. Claiming child benefit means you qualify for National Insurance credits, which count towards your state pension. So don’t cancel the benefit or avoid claiming it entirely – claim the benefit but waive the payments.
Loss of state help with childcare
This includes tax-free childcare, which is worth up to £2,000 a year and is available until earnings hit £100,000, at which point parents no longer qualify. This threshold hasn’t moved since April 2017. It also includes the free childcare hours for younger children. The cost of this loss will depend on the number of children and their childcare costs, but it can suddenly add thousands of pounds to outgoings.
Impact on Savings and Investments
Dividend Tax
You’ll pay a higher rate of tax on dividends if you change tax brackets. Basic rate taxpayers pay tax at 8.75% and higher rate taxpayers 33.75%. This increased in April 2022 and is set to rise again this April to 10.75% and 35.75%. The tax-free allowance has also fallen from £5,000 in 2017-18 to £500 in the current tax year, pushing more people into paying this tax.
Capital Gains Tax
You’ll pay a higher rate of Capital Gains Tax (CGT) after crossing the threshold, and since October 2024, the rate for gains on stocks and shares has risen to 18% for basic rate and 24% for higher rate taxpayers. In the current tax year, you can make gains of only £3,000 before paying tax – down from £12,300 in 2022-23.
Tax on Savings
Currently you pay tax on savings at your marginal rates but from 2027, savings will attract a higher rate of Income Tax than other forms of income – so basic rate taxpayers will pay 22%, higher rate taxpayers 42% and additional rate taxpayers 47%. You also have a smaller personal savings allowance.
Higher rate taxpayers can make £500 of interest before worrying about tax, but £0 for additional rate payers. The personal savings allowance hasn’t risen since it was introduced in April 2016.
Steps to reduce your Tax Liability before the end of the Tax Year
Pay into a Pension
Higher‑rate taxpayers can claim tax relief at their top marginal rate. This year you may be able to contribute up to £60,000 into your pension, and you may also be able to use carry‑forward rules to tap into unused allowances from the previous three tax years.
Avoid the £100,000 threshold trap, by using pension contributions
Earning more than £100,000 triggers a tapering of your personal allowance, which pushes your effective tax rate to around 60%. Making a pension contribution can bring your income back below the threshold, restoring your allowance and significantly reducing the tax you owe.
For example, if you earn £101,000 and contribute £1,000 to your pension, you receive £400 in tax relief. Your income also falls to £100,000, preventing the loss of personal allowance and saving an additional £200 in tax. In effect, that £1,000 contribution costs you just £400.
Parents may also benefit in another way: reducing income below £100,000 can help preserve eligibility for tax‑free childcare.
Use your Capital Gains Tax allowance
Each tax year you can realise gains up to the CGT allowance without paying tax. If you hold investments outside an ISA, you can sell and repurchase them within an ISA using a Bed and ISA transaction. This shifts the assets into a tax‑free environment while using up your annual allowance.
- Offsetting losses against gains
Capital losses realised during the tax year can be set against gains, reducing the amount that is taxable. If your gains remain above the allowance after using current‑year losses, you may also be able to deduct unused losses from previous tax years, provided they were reported to HMRC.
- Carrying losses forward
If only part of your historic losses is needed to bring your gains below the tax‑free allowance, the remaining losses aren’t wasted. They can be carried forward indefinitely and used in a future tax year when they offer the greatest benefit.
Escape the High Income Child Benefit Charge (HICBC)
The benefit of paying into a pension also reduces your adjusted net income. If you are a parent earning between £60,000 and £80,000, cutting back towards £60,000 means you can reduce your HICBC.
Plan as a couple
If you are married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income producing assets into their name. It means you can both take advantage of your tax allowances. You can also use all the tax-efficient vehicles at your disposal, including your ISAs and pensions, as well as the Junior ISAs and Junior SIPPs of any qualifying children.
Protect as much of your income-paying assets in ISAs
Consider a Venture Capital Trust (VCT)
Venture Capital Trusts aren’t right for everyone, because they are higher risk, so should only ever be considered as a small part of a large and diverse portfolio. However, if you use these schemes, in addition to the CGT and dividend tax saving, you can get up to 30% Income Tax relief on the amount invested.
As always the information outlined above is for general guidance purposes only. We appreciate that every individual and business has different circumstances and you should always seek appropriate professional advice before you act on any of the information provided.
If you would like more information, advice or require wider business planning or financial guidance, please do get in touch with you GWA Partner. Alternatively, if you are not a GWA client please contact us to arrange a free initial meeting.
