Managing your tax efficiently

The 2025/26 tax year is fast approaching, and many of us are looking at the tax we will be paying.

If we earn under £50,270, we pay income tax at 20% after a tax-free personal allowance, - of £12,570. Go over £50,270, and we start getting into the realms of higher rate tax. We pay 40%, double the basic rate, on everything above £50,270.

If you think you don’t earn that kind of money, you might still have a problem. The Government has confirmed in the last Budget that freeze on income tax thresholds will remain until 2028. Steady inflation may mean that millions more taxpayers face being dragged into the 40% tax bracket in the coming years.

At Continuum we are looking at ways to help clients manage their tax position effectively. 

More money = more tax

Earning more money means you’ll have a higher take-home pay, but you’ll also have more tax to pay as a percentage of your income.

So, If you earn £50,570

1. Personal Allowance: £12,570 (tax-free)
2. Basic Rate Tax Band:
   • Taxable income in this band: £37,700 (Tax rate: 20%)
   • Tax: £37,700 x 20% = £7,540
3. Higher Rate Tax Band:
   • Taxable income in this band: £300 (£50,570 - £50,270) (Tax rate: 40%)
   • Tax: £300 x 40% = £120

4. Total Tax Bill: £7,540 (basic rate) + £120 (higher rate) = £7,660
5. Take Home Pay before NI and other deductions: £50,570 - £7,660 = £42,910

So, your take-home pay before NI and other deductions would be £42,910

If you earn £51,570

1. Personal Allowance: £12,570 (tax-free)
2. Basic Rate Tax Band:
   • Taxable income in this band: £37,700 (Tax rate: 20%)
   • Tax: £37,700 x 20% = £7,540
3. Higher Rate Tax Band:
   • Taxable income in this band: £1,300 (£51,570 - £50,270) (Tax rate: 40%)
   • Tax: £1,300 x 40% = £520

4. Total Tax Bill: £7,540 (basic rate) + £520 (higher rate) = £8,060
5. Take Home Pay before NI and other deductions: £51,570 - £8,060 = £43,510

So, your take-home pay before NI and other deductions would be £43,510

N.B

£50,270 is the upper limit for basic rate taxpayers, and the first £37,700 of income (after the personal allowance) is taxed at 20%. Anything above this is taxed at the higher rate (40%) until you reach the additional rate tax band of £125,140, where income above this threshold is taxed at 45%

That £1000 raise is worth just £600 to you (excl: NI and other deductions). The taxman enjoys your pay rise more than you do.

How do I stay under the 40% tax threshold?

To stay within the basic rate tax band, ,  you need to be earning less than £50,270. You can’t simply turn down income to stay below the threshold, - there are potential ways to minimise your taxable income and make the most of your earnings. 

Staying in the basic rate tax zone can be even more beneficial if you have capital gains tax or dividend tax to pay, as the tax rates depend on your income tax band.

Some strategies may – only be effective if  you are just over a certain limit – but there may be a way not only to defer a huge slice of your immediate income, but also maximise the benefits with the taxman’s help. 

The most effective way to cut your immediate income for tax purposes is to pay more into your pension. The Government wants you to save for your future and pays tax relief on money you save into a personal or workplace pension, which is currently up to £60,000 a year, therefore reducing how much income tax you pay.

In most cases you can pay £60,000 into a pension each year, as long as it’s not more than your annual earnings. In theory, this means someone earning £110,000 could get their taxable income back down to £50,000 and into the 20% tax zone by squirrelling away the maximum £60,000 into their pension. (It's important to note that for every £2 earned over £100,000, £1 of the Personal Allowance is lost. This means the Personal Allowance would be reduced, affecting the overall tax calculation.) At £125,140 and above, the entire Personal Allowance is lost, meaning every 1 earned is taxed from the first penny.

If retirement is coming close and your pension pot could use a boost, it could be a very sensible tactic.

What other ways are there?

A salary sacrifice arrangement is not only for pension saving. It can work for you whenever you agree to a salary cut, or waive a bonus, in favour of another benefit.  It’s possible for those earning just above a tax threshold to drop a tax income band.

As you pay for the product or service from your gross pay, you save not just income tax but also National Insurance. Your employer must agree to and facilitate the salary sacrifice arrangement, as the changes to your salary are reflected in your pay and tax calculations.  There are a number of factors to be mindful of when using this type of scheme such as impact on future earnings and potential for reduced benefits amongst others.

All forms of income contribute to the amount of income tax you pay, as they are added together to determine your tax band. This includes income from savings interest, dividend payments and capital gains. By using ISAs you can reduce the taxable income, and potentially keep your tax liabilities to a lower band.

This is not an exhaustive list of ways to reduce your tax liability. Tax is complicated, and the best strategy is to get expert advice.

At Continuum we have the expertise you need. The first step to minimising your higher-rate tax liabilities could be a call to us.

Budget 2024 summary: Key points from Rachel Reeves’s speech - BBC News

Tax rates 2024/25: tax bands explained - MoneySavingExpert

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable taxation or investment strategy, you should seek independent financial advice before embarking on any course of action.

The Financial Conduct Authority does not regulate taxation advice.

The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk

A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.  We recommend that the investor seeks professional advice on personal taxation matters.