Horrified by your tax bill? Here are 15 smart ways to cut it
Taxes are rising for just about everyone – make sure you’re not paying more than you need to.
By Charlotte Gifford and Josh Kirby
25 January 2026 6:30am GMT
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Tax bills are on the rise for just about everyone in Britain, thanks to long-frozen tax thresholds – and many people are worried about needing to pay much more in the future.
It’s therefore more important than ever to ensure you’re not paying more tax than you need to.
Here, Telegraph Money outlines 15 strategies that could save you tax in 2026.
1. Increase your pension contributions
Growing numbers of taxpayers are edging into the higher-rate and additional-rate tax bands. This is because income tax thresholds have been frozen since 2022 and are set to remain frozen until April 2031.
This means increasing numbers of people are being dragged into higher bands as pay increases, which is an example of “stealth tax”.
In addition, hundreds of thousands of workers entered the 45pc threshold in April 2023 after the Conservative government lowered the additional rate threshold from £150,000 to £125,140.
Around 11pc of the population now pays higher rates of tax – compared to just 3.5pc in 1991, according to the Institute for Fiscal Studies, a think tank.
One of the most effective ways to reduce your income tax bill is by increasing your pension contributions.
Shaun Moore, of investment firm Quilter, said: “Contributions to your pension are eligible for tax relief at your highest rate of income tax. This not only aids in building a retirement fund but also reduces your immediate tax bill.”
How to get started
- Speak to your employer about increasing contributions to a workplace pension scheme
- If self-employed, consider a self-invested personal pension (Sipp)
- For more details, visit the HMRC pension tax relief page
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Example
Mr Moore explained how a person earning £52,000, in the higher-rate tax band, could save £2,345.60 in income tax by increasing their pension contributions.
“With an income of £52,000, the total income tax liability is £8,231.60. By making a pension contribution of £10,000, the individual’s taxable income is reduced to £42,000. After applying the personal allowance of £12,570, the new taxable income is £29,430. This entire amount is taxed at the basic rate of 20pc, resulting in an income tax liability of £5,886.
“The pension contribution effectively lowers the taxable income, resulting in a tax saving of £2,345.60.”
This is illustrated in the chart below:
Meanwhile, a person looking to invest £10,000 could save over five years by putting the money in an Isa and shielding it from capital gains tax (CGT) and dividend tax.
“Assuming an average annual return of 5pc, the investment would grow to approximately £12,763 over five years. In a general investment account, the gains and dividends would be subject to tax, potentially reducing the overall return. By holding the investment in an Isa, the individual can avoid paying any CGT or dividend tax, maximising their returns,” Mr Moore said.
Finally, Mr Moore calculated that: “A person with an estate worth £1m could save £150,000 in inheritance tax by making lifetime gifts. Initially, with an estate valued at £1m, the current inheritance tax liability would be £270,000, calculated at 40pc on £675,000 (the amount exceeding the £325,000 threshold).
“By giving away £300,000 during their lifetime and living seven years after the gift, the individual reduces the value of their taxable estate to £700,000. Consequently, the new inheritance tax liability would be £120,000, calculated at 40pc on £300,000 (the amount now exceeding the threshold). This effectively lowers the taxable estate, resulting in a tax saving of £150,000.”
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2. Donate to charity
Alternatively, you could donate to charity to reduce your tax bill.
“Through Gift Aid, charities can claim an extra 25p for every £1 you donate, and if you’re a higher-rate taxpayer, you can claim back the difference between the rate you pay and the basic rate on your donation. This strategy not only supports good causes but also reduces your taxable income,” explained Mr Moore.
How to get started
- Ensure you have paid at least as much tax as the charity will claim back. For example, if you donate £100 and the charity claims £25 from HMRC, you must have paid at least £25 in tax that year. If this is not the case, HMRC may recover the difference from you.
- Record donations to include in your self-assessment tax return.
The box below shows how Gift Aid can cut your tax bill.
3. Use a salary sacrifice scheme
Salary sacrifice schemes allow you to exchange part of your salary for various benefits pre-tax, including salary sacrifice on electric vehicles, pensions and bikes.
Taking advantage of a salary sacrifice scheme can reduce your income tax in a similar way to making pension contributions, as the money is taken pre-tax.
However, the benefits of salary sacrifice are due to change from April 2029. At the 2025 Budget, the Chancellor announced the relief from National Insurance would be capped at £2,000 a year – meaning that it will start being charged on sacrifices above this threshold.
Example
A £50,000 earner opts to sacrifice £5,000 for additional pension contributions. This reduces their taxable income to £45,000, lowering their income tax liability.
How to get started
Speak to your HR department about any available schemes in your workplace.
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4. Claim marriage tax allowance
If you’re married, you may be able to claim marriage tax allowance, which can cut a couple’s tax bill by up to £252 a year. This applies when one partner earns less than the personal allowance of £12,570 and transfers 10pc of their allowance to the higher-earning partner.
However, you can only claim marriage tax allowance if your partner pays tax on their income at the basic rate – in other words, they take between £12,571 and £50,270 as income per year.
You can apply for marriage allowance online via the government website.
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5. Use your capital gains tax-free allowance
The capital gains tax annual exemption amount allows individuals to make gains of up to £3,000 in a given tax year without paying tax.
It has become increasingly difficult to avoid large capital gains tax bills as the allowance has been dramatically reduced over the past few years. Some tax rates have also changed.
In the October 2024 Budget, Rachel Reeves announced capital gains tax rates on shares would be increased to match rates paid on the sale of properties. This means basic-rate taxpayers now pay 18pc, while higher-rate payers are charged 24pc (up from 10pc and 20pc respectively).
However, after the 2025 Budget, Ms Reeves confirmed to MPs that some other rumoured changes to CGT, including levying it on primary residences, would not be brought in during this parliament.
This makes it even more beneficial to make use of the full allowance to reduce your tax bills.
Example
You sell investments that represent a £5,000 gain outside your Isa or pension this year. You pay no tax on the first £3,000 but 24pc on the remaining £2,000 as you are a higher-rate taxpayer. This means you pay £480 in CGT rather than £1,200 had the CGT annual exempt amount not been applied.
6. Hold investments in an Isa
The simplest thing you can do to reduce capital gains tax on your investments is make the most of your £20,000 annual Isa allowance; investments held in a stocks and shares Isa remain free from both CGT and dividend tax – regardless of how much your returns may grow over time. This means you can avoid the 18pc or 24pc capital gains tax as in the example above.
Note that those under the age of 65 who want to use an Isa’s tax benefits for saving cash will have their allowance reduced to £12,000 from April 2027. The remaining £8,000 of their allowance can only be invested.
Example
If a stocks and shares Isa with £20,000 were to grow by 5pc annually, over five years this would generate tax-free growth of £5,525.
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7. Claim for losses
Another way to reduce your capital gains tax bill is to claim for losses. If your investments have made a loss when you come to sell, you can use these to offset against profits made elsewhere. If you have losses from previous years that haven’t already been offset, you may be able to use them too.
Example
You sell one asset at a loss of £3,000 and another at a £5,000 gain. This leaves a net gain of £2,000, which falls below the annual allowance of £3,000, meaning you do not incur any capital gains tax.
How to claim
- Make sure to report any losses on your self-assessment tax return
- Check if you have unclaimed losses from previous years to carry forward
- Hold past losses in reserve and use them to offset future capital gains to ensure you remain as close to the CGT annual exempt amount as possible
8. Consider transferring assets to your spouse
You may want to consider transferring some savings or investments to a spouse if their earnings are lower to minimise capital gains and dividend tax. Even if you have both already used up your Isa allowances for this tax year, they will at least be charged a lower rate of tax if returns exceed the tax-free thresholds.
Example
You, a higher-rate taxpayer, transfer dividend-generating shares to your spouse, a basic-rate taxpayer. This reduces the tax rate on dividends by 25pc, from 33.75pc to 8.75pc.
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9. Make sure you know your personal savings allowance
Higher interest rates paid on nest eggs mean that more and more savers are coming into the scope of paying tax on their savings interest.
The personal savings allowance – the amount someone can earn in interest on their savings before having to pay tax – has been frozen since it was first introduced in 2016.
The personal savings allowance is just £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers, while additional-rate taxpayers get no allowance at all. Those with lower earnings (less than £17,570) can also benefit from the savings starting rate, which adds a tax-free savings allowance of up to £5,000.
As a result, a higher-rate taxpayer earning 5pc would need only £10,001 in savings before they were hit with a tax bill.
It’s important to know the personal savings allowance you’re entitled to and plan accordingly – especially since, from 2027, the rates of income tax payable on savings will increase by two percentage points, as announced in the 2025 Budget.
10. Move savings to a tax-free Isa
One way to make sure your savings interest remains free from tax is using an Isa – cash Isas work in the same way as savings accounts, except they’re also subject to the annual Isa allowance. From April 2027, this annual allowance will drop from £20,000 to £12,000, but only for savers who are under 65.
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11. Move savings to the lower-paid spouse
If you’ve already maxed out your Isa allowance, it can make sense for spouses to move the bulk of savings to whichever partner earns the least – they will have the larger personal savings allowance, so you can minimise the household’s tax bill.
The list below details what to keep in mind when it comes to savings interest.
12. Consider saving for your children with a Jisa
You can also save up to £9,000 a year into a Junior Isa for your child. If you maximise the amount each year, this equates to £162,000 saved in a tax-free Isa.
Example
By saving £9,000 annually at a growth rate of 5pc for 18 years, you would achieve a tax-free pot of approximately £280,000.
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13. Use the £3,000 annual gift allowance
The OBR revealed in November that the tax continues to raise record amounts for the Government, with thresholds now frozen until April 2031.
If your estate could fall into the net, then the simplest thing you can do is give away wealth during your lifetime.
Every individual gets a £3,000 annual gift allowance. However, you can give away as much as you like provided you survive the gift by seven years – this is known as the seven-year rule.
14. Try to plan around the seven-year rule
If the donor passes away within the seven-year window, then the gift will be included as part of their estate. If the combined estate is worth more than £325,000, inheritance tax may be due.
15. Consider your beneficiaries to make use of the residence nil-rate band
Aside from the standard inheritance tax threshold of £325,000 per person, the residence nil-rate band (RNRB) is an additional allowance of up to £175,000 that applies when passing on a main residence.
Couples can also pass unlimited sums to each other, and pool their allowances. Therefore, if a couple combines both their standard tax threshold and the additional £175,000 RNRB, they could leave up to £1m for their heirs tax-free.
However, if you’re planning to use the residence nil-rate band – which applies to your main home – make sure you consider who is going to receive it in your will. The extra tax-free allowance is only applicable for direct descendants, so it can be used if your property is going to children, step-children or grandchildren, for example, but is not accepted for nieces, nephews or other relatives.
Our separate guide goes into more detail on how to avoid inheritance tax.
View this Telegraph (UK) article CLICK HERE
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