Seven things to consider when you become a higher-rate taxpayer

The number of people paying 40% income tax has ballooned in recent years. Data from gov.uk estimates that there are 7.08 million higher-rate taxpayers in the 2025-26 tax year, a massive 38% uptick versus 2022-23.

This trend hasn’t happened by accident. The government has kept income tax thresholds frozen since 2021, with the deep freeze set to endure until 2028-29, dragging more people into higher-rate territory as their earnings rise.

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If you’ve recently tripped into the 40% bracket, or expect to soon, it’s not just your salary or profits you need to be mindful of: HMRC can take a greater share of investment gains, dividends and savings interest, some tax-free allowances become less generous, and your workplace pension contributions may not keep pace with your rising earnings.

Here are six things to consider if you’re affected, together with some tips to keep HMRC at bay.

1) Understand how taxes on income shift

To grasp changes to income taxes once you enter the 40% threshold, we need to break things down into three groups: employed workers, self-employed workers and anyone aged 66 or older.

Employed and self-employed workers pay two taxes on earnings and profits, respectively: income tax and national insurance (NI). On anything between £12,570 and £50,270, you pay 20% income tax, and employees pay 8% NI, while the self-employed pay 6%.

Once you exceed £50,270, income tax doubles to 20% but NI falls to just 2%, so the tax increase is either 16 or 18 percentage points depending on your employment status.

When you reach state pension age (current 66 but rising to 67 in 2028) you stop paying NI, whether you’re still working or not.

2) Enjoy higher pension tax relief, but make sure you claim it back

Paying into a pension becomes more attractive once you’re a 40% taxpayer. As upfront income tax relief is applied at your marginal rate – in other words, the rate you pay on the next pound you earn. For every £100 contributed, it costs you £60 instead of £80.

However, you might not get the extra relief immediately. When you make personal pension contributions into something like a self-invested personal pension (SIPP), basic-rate tax is added at source, but higher-rate taxpayers must reclaim the additional amount via self-assessment. Thousands of people fail to do this every year and miss out on valuable free money.

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If you’re a member of a workplace pension, it’s crucial to find out whether your scheme operates relief at source or is a net pay arrangement. The former works the same as personal pension contributions as outlined above, so you’ll need to fill out a tax return to claim higher-rate relief. If you’ve forgotten, don’t worry – you can backdate claims for up to four years.

In contrast, with a net pay arrangement pension contributions are deducted before your wages are taxed, meaning full relief is applied straightaway. This is also the case if your employer offers salary sacrifice – where you trade a portion of your salary for a pension payment – plus you’ll save NI, too, bringing the total automatic tax saving to 42%.

However, be aware that as NI drops once you reach the 40% band, salary sacrifice becomes less generous.

3) Check your workplace pension contributions

Under auto-enrolment laws, if you pay 5% of earnings into a pension, your employer must pay 3%.

But importantly, the rules state that this only applies to “qualifying earnings”, which are those that fall between £6,240 and £50,270 – essentially up to the 40% tax threshold.

These are, however, only minimum requirements. Many employers base pension contributions on full salary, others on total earnings, although some do stick to the legal minimums.

As such, it’s vital to understand the contribution basis used by your workplace scheme, otherwise your pension payments might fall behind your rising salary, which if left unchecked over many years could rip a large hole in your eventual retirement savings.

4) Mind the child benefit charge

If your income rockets past the 40% threshold and you have young children, there’s a nasty tax trap lying in wait: the High-Income Child Benefit Charge.

The way this works is that for every £200 you earn above £60,000 you pay a 1% charge on child benefit payments, meaning it’s effectively wiped out once income hits £80,000. Child benefit is paid at a rate of £26.05 a week for your first child, and £17.25 for any additional ones, so it’s certainly worth having.

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Pension contributions, provided you’re happy to tie the money up until retirement, are your friend here as they reduce what’s called your adjusted net income. So, if you have two children and your income is £70,000, a £10,000 gross pension payment will reduce taxable income to £60,000, escaping 40% tax and swerving the child benefit charge – a total saving of £5,125.80 (£4,000 tax relief and £1,125.80 child benefit charge).

5) Guard against bigger taxes on investment gains and dividends

Income tax isn’t the only levy that increases once you trip into the higher-rate bracket. Rates of capital gains tax (CGT) hike from 18% to 24%, while dividend tax leaps from 8.75% to 33.75%.

That doesn’t necessarily mean you’ll pay the higher rates - you can enjoy a certain amount annually tax free, which are £3,000 and £500 for gains and dividends, respectively.

To protect yourself here, an effective tactic is to use tax wrappers such as stocks & shares individual savings accounts (ISA) and pensions as they protect any gains and dividends from the taxman.

With an ISA, you can invest £20,000 each year, while most people can pay the lower of £60,000 or 100% of earnings into a pension annually and get upfront tax relief – although this might reduce to £10,000 if you’ve made a flexible and taxable withdrawal from your pension.

What if my investment gain pushes me above £50,270?

In this scenario, the taxable gain, when added to income, that falls below £50,270 will be taxed at the lower rate, with the higher rate applied on the amount above.

For example, if your income is £45,000 and you realise a £10,000 taxable gain from selling shares, £5,270 is taxed at 18% (£948.60), while HMRC takes 24% of the remaining £4,730 (£1,135.20).

6) Keep an eye on your cash savings

The savings allowance enables you to earn a certain amount of interest every year tax free. But how much you get depends on which tax bracket you fall into. If you earn below £50,270, your allowance is £1,000, higher-rate taxpayers get £500, while anyone who earns above £125,140 doesn’t get an allowance.

The impact once you nudge above the higher-rate tax band is two-fold. First, your savings allowance cuts in half, increasing the odds of paying tax on your cash accounts. Second, the tax payable on your savings doubles from 20% to 40%.

To protect your savings, consider cash ISAs, as any interest is paid free of tax. Note the £20,000 annual ISA allowance stretches across all ISA types, so if you’ve pumped £15,000 into a stocks & shares ISA this year, you have £5,000 spare for the cash version.

Beyond this, premium bond prizes are tax free (although they’re not guaranteed) and planning jointly if you’re in a couple can be prudent. For instance, if you’re married or in civil partnership, have both used your annual tax-free savings allowance and maxed out your ISAs, consider holding cash savings in the lower taxpayer’s name.

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7) Retain eligibility for the marriage allowance

The marriage allowance enables a non-taxpaying spouse or civil partner to transfer up to 10% (£1,260) of their £12,570 personal allowance to their better half, which can result in an annual tax credit of £252.

There is, however, a sting in the tail. The higher-earning spouse must be a basic-rate taxpayer, so the facility to use this handy allowance is lost if their income is just a pound over £50,270. Importantly, things such as the dividend allowance and savings allowance are ignored for eligibility.

One tactic to retain the marriage allowance is to make a pension contribution equal to the amount that falls into the 40% tax band. Let’s say taxable income is £52,000 - a £1,230 gross pension payment will extend your 20% tax band from £50,270 to £52,000, meaning you swerve 40% income tax (£492) and retain the £252 credit – an effective tax saving of 60% in this example. But again, you must be happy to lose access to this money until your later years.