Could a pay rise reduce your tax allowances? How to cut your income tax bill instead
Many people fear a pay rise will mean missing out on valuable tax benefits but there are steps you can take to earn more without losing out financially.
Many workers are snubbing pay rises amid fears of higher taxes, research suggests.
While most people would welcome higher wages, one in six (16%) have hesitated over or refused a pay rise, bonus or promotion because they were concerned they could lose out financially, according to research by Standard Life. This includes 5% who have turned an opportunity down altogether.
This is due to frozen income tax thresholds, which last increased in England, Wales and Northern Ireland five years ago and aren't set to rise until at least April 2031. The freeze is pushing people into higher tax brackets at a faster rate than if the thresholds had kept pace with inflation, which is known as fiscal drag.
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The tax-free personal allowance would be £16,072 in 2026/27 had it kept pace with inflation – £3,502 higher than its current £12,570 level, Standard Life said.
The higher-rate threshold would be £64,274, rather than £50,270.
Based on this, the frozen personal allowance adds £700.36 to the annual income tax bill of a basic rate taxpayer who uses the allowance in full, Standard Life said.
It is not just higher taxes that are worrying people – they may also lose valuable tax allowances as their pay rises.
The analysis found that a fifth say paying a higher rate of income tax could make them consider turning down a pay rise, while 7% cite the risk of losing other financial support or allowances and 5% point to losing childcare support.
Neil Jones, tax and estate planning specialist at Standard Life , said: “A pay rise, promotion or bonus should be something to celebrate, so it’s concerning that some people are thinking twice because they’re worried they could end up worse off.
"It’s understandable that people want to protect valuable allowances and manage how much tax they pay, but turning down additional income without fully understanding your options could mean missing out unnecessarily.”
The risks of a pay rise
A pay rise is a good sign that your career is progressing but as you earn more, you could end up having to give up valuable tax benefits.
For example, parents could be taxed on Child Benefit payments or lose them altogether once one person in the household earns more than £60,000 under the High Income Child Benefit Charge. Under this tax, HMRC takes 1% of the total Child Benefit received for every £200 of income between £60,000 and £80,000. The money is fully clawed back at £80,000.
Basic rate taxpayers get a £1,000 per year personal savings allowance but this is reduced to £500 per year for higher earners. Additional rate taxpayers don't get a personal savings allowance.
There are more allowances lost once you earn above £100,000.
For instance, you lose eligibility for tax-free childcare once you earn above £100,000.
Plus, for every £2 you earn over £100,000, you lose £1 of your standard £12,570 personal allowance, dropping to zero once your income reaches £125,140.
This creates an effective 60% tax rate on taxable income between £100,000 and £125,140.
How to cut your income tax bill
There are several tax-saving strategies to consider before rejecting a pay rise.
The first recommendation is to increase pension contributions.
If your employer offers salary sacrifice, increasing pension contributions can reduce your taxable income while putting more into your pension.
Jones said: "This can be particularly useful if a pay rise takes you into a higher tax band or across another important income threshold. You may also pay less National Insurance (NI) than if you took the additional salary as cash."
The rules around pension salary sacrifice are due to change from April 2029 with a £2,000 cap being introduced on NI relief.
Pension contributions also benefit from tax relief. Basic rate taxpayers effectively receive 20% tax relief, while higher and additional rate taxpayers can qualify for relief at 40% and 45%. Depending on how contributions are made, the additional relief may need to be claimed from HMRC, so it’s worth checking you’re receiving what you’re entitled to.
Beyond pensions, you could also reduce your taxable income by making use of company benefits such as gym membership or a car scheme that may be available to fund through salary sacrifice.
Charitable donations can also reduce your taxable income and it may be worth changing the timing of how or when you receive a bonus.
Eamonn Prendergast, chartered financial adviser at Palantir Financial Planning, said: “The answer is planning, not earning less.
“When workers genuinely consider refusing career progression because of tax, policymakers should be asking whether the tax system itself has become part of the problem.”
