How can you reduce your income tax bill instead of having your tax allowances reduced by a pay raise?

Many people worry that receiving a pay increase will mean losing out on important tax benefits, but there are ways to increase your income without suffering financial setbacks

According to research, many employees are rejecting pay increases out of concern about higher taxes.

According to Standard Life research, one in six people (16%) have hesitated over or refused a pay increase, bonus, or promotion because they were worried they might lose out financially, even though the majority of people would welcome higher wages. This includes 5% of people who have completely rejected an opportunity.

This is because income tax thresholds in England, Wales, and Northern Ireland have been frozen for the past five years and won't rise again until at least April 2031. Fiscal drag is the term for how the freeze is forcing people into higher tax brackets more quickly than if the thresholds had kept up with inflation.

According to Standard Life, if the tax-free personal allowance had kept up with inflation, it would have increased from its current level of 12,570 to 16,072 in 2026-2027.

The higher-rate threshold would be 64,274 instead of 50,270. Watch the entire video here.

According to Standard Life, the annual income tax bill of a basic rate taxpayer who fully utilizes the allowance is increased by 700.36 due to the frozen personal allowance.

People are concerned about more than just higher taxes; as their income increases, they might also lose important tax benefits.

According to the analysis, 5% of respondents say that paying a higher income tax rate might make them think twice about accepting a pay increase, 7% mention the possibility of losing other financial assistance or allowances, and 5% mention losing childcare support.

"A pay increase, 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," stated Neil Jones, Standard Life's tax and estate planning specialist.

"It makes sense that people would want to manage their taxes and safeguard their valuable allowances, but declining extra income without fully understanding your options could result in unnecessary loss."

The dangers of a pay increase.

A pay increase is a positive indication that your career is developing, but as you make more money, you may have to forfeit important tax advantages.

For instance, if one member of the household makes more than £60,000 under the High Income Child Benefit Charge, parents may lose their Child Benefit payments entirely or be subject to taxation on them. For every £200 in income between £60,000 and £80,000, HMRC deducts one percent of the total Child Benefit. The sum of 80,000 is fully recouped.

Higher earners receive a personal savings allowance of £500 annually, while basic rate taxpayers receive £1,000 annually. A personal savings allowance is not given to additional rate taxpayers.

Once your income exceeds £100,000, you lose additional allowances.

For example, if your income exceeds £100,000, you are no longer eligible for tax-free childcare.

Additionally, you lose one of your regular 12,570 personal allowance for every two dollars you make over 100,000; once your income reaches 125,140, it is zero.

For taxable income between £100,000 and £125,140, this results in an effective 60% tax rate.

How to lower your income tax liability.

Before declining a pay increase, there are a number of tax-saving options to take into account.

Increasing pension contributions is the first recommendation.

Increasing your pension contributions can lower your taxable income while increasing your pension if your employer offers salary sacrifice.

"This can be especially helpful if a pay increase puts you in a higher tax band or across another significant income threshold," stated Jones. Additionally, compared to taking the extra pay in cash, you might pay less National Insurance (NI)."

With the introduction of a 2,000 cap on NI relief in April 2029, the regulations pertaining to pension salary sacrifice are scheduled to change.

Tax relief also helps pension contributions. Higher and additional rate taxpayers may be eligible for 40% and 45% tax relief, while basic rate taxpayers essentially receive 20%. The additional relief may need to be claimed from HMRC, depending on how contributions are made, so it's important to make sure you're getting what you're entitled to.

In addition to pensions, you can lower your taxable income by utilizing company perks like a car program or a gym membership that can be paid for through salary sacrifice.

Giving to charities can also lower your taxable income, and it might be worthwhile to adjust when or how you get bonuses.

"The solution is planning, not earning less," stated Eamonn Prendergast, a chartered financial adviser at Palantir Financial Planning.

"Policymakers ought to consider whether the tax system itself has become a contributing factor when employees sincerely consider declining career advancement due to taxes."