A guide to higher rate tax planning

In England, Wales, and Northern Ireland, individuals earning over £50,271 annually fall into the higher rate taxpayer category, subject to a 40% income tax. Those earning over £125,140 are classified as additional rate taxpayers and are taxed at 45%.

In Scotland, the tax bands are slightly different. Higher rate taxpayers pay 42% on earnings between £43,663 and £75,000, 45% on earnings between £75,001 and £125,140, and 48% on earnings above £125,140.

From 6 April 2026 (2026/27), Scotland will raise only the lower thresholds (Starter, Basic and Intermediate). The Higher (42%: £43,663–£75,000), Advanced (45%: £75,001–£125,140) and Top (48%: over £125,140) bands remain unchanged.

For individuals in these higher tax brackets, effective tax planning is crucial to identify opportunities for reducing tax payments, saving more, and planning for the future.

Contributing to a pension is one of the most tax‑efficient ways to save for retirement. You can contribute up to 100% of your UK relevant earnings to a pension, subject to the annual allowance of £60,000. If your contributions exceed this amount, you may be able to use carry forward from the previous three tax years (provided you were a member of a registered pension scheme during those years) to offset the excess. Working with a financial adviser could help you understand whether you have unused allowance available and plan your pension contributions accordingly.

As a higher or additional rate taxpayer, you benefit from 40-45% in tax savings. This applies to both workplace and personal pensions, although for self-invested personal pensions you will need to claim the additional 20-25% relief through a self-assessment tax return, your pension provider will claim the basic rate relief of 20% for you. Typically, with a workplace pension you get the relief directly through payroll, so you do not need to file a self-assessment return.

Many employers offer salary sacrifice arrangements, where you agree to give up part of your salary and your employer pays this amount into your pension on your behalf. This can be tax‑efficient, as both you and your employer may save on National Insurance contributions. The government has announced a future cap on the National Insurance benefits of salary sacrifice, but this will not take effect until 6 April 2029. Because salary sacrifice involves contractual changes, our advisers can explain the general pros and cons, but cannot provide advice on whether it is right for you. You should speak to their HR or payroll department to understand how their employer’s scheme works and whether this approach is suitable.

You can receive tax relief on private pension contributions worth up to 100% of your UK relevant earnings. The way this tax relief is applied depends on the pension scheme you have and the rate of income tax you pay. For personal pensions, 20% basic‑rate tax relief is added automatically, for example, an £80 contribution becomes £100.

If you are a higher‑ or additional‑rate taxpayer, you may be able to claim extra tax relief:

• 20% additional relief on income taxed at 40%
• 25% additional relief on income taxed at 45%

This extra relief is normally claimed through a Self-Assessment tax return.

For most workplace pension schemes, tax relief is given automatically through payroll, meaning you typically do not need to complete a Self-Assessment return to receive it.

Scottish taxpayers have different income tax bands. While the Scottish basic rate is currently 19%, tax relief is still added at 20% for personal pensions. Scottish taxpayers may need to complete a Self-Assessment tax return to claim any additional relief for the Intermediate, Higher or Advanced income tax bands.

If you're employed, increasing your pension contributions often means your employer will increase theirs too. Check your pension policy documents for details on how you can take advantage of this benefit. Keep in mind that pension funds are not accessible until you reach retirement age, currently set at 55 but increasing to 57 from April 2028.

Individual Savings Accounts (ISAs) allow you to save up to £20,000 tax-free each tax year. There are different types of ISAs to suit various needs:

• Cash ISA: Earns tax-free interest on your savings.
• Stocks & Shares ISA: Aims to generate returns through dividends and capital growth. Whilst a Stocks & Shares ISA may outperform cash savings, it carries more risk. Investments can go down as well as up, and you could get back less than you invest.
• Lifetime ISA (LISA): Used for saving for your first home or retirement, with a 25% government bonus on savings up to £4,000 per tax year. Must be opened by age 40, but you can contribute until age 50.
• Junior ISA (JISA): Allows parents or guardians to save up to £9,000 per tax year for their child's future, accessible only when the child turns 18.

From April 2027, new ISA reforms will come into effect. While the overall annual ISA allowance will remain at £20,000, a key change is that the amount that can be held in a Cash ISA will be capped at £12,000 for adults under age 65. Individuals aged 65 and over will still be able to allocate the full £20,000 into cash if they choose. These changes apply only to Cash ISAs; the full £20,000 limit will continue to be available for Stocks & Shares ISAs.

Salary sacrifice schemes allow employees to exchange part of their salary for non-cash benefits, such as extra holiday. This reduces taxable income, saving on tax and/or National Insurance. For example, a taxpayer near the next tax bracket could reduce their tax and National Insurance by sacrificing some salary for non-cash benefits. However, participating in salary sacrifice may mean declaring a lower income with some lenders when applying for mortgages or loans, potentially reducing borrowing capacity.

If you own company shares, you may receive dividend payments. While taxable, you have a dividend tax allowance each year. This allowance is £500, meaning you only pay tax on dividends above this amount. The dividend allowance is the same for everyone and cannot be carried over to the next year.

Selling an additional property or other chargeable asset may give rise to Capital Gains Tax (CGT). Each individual has a £3,000 annual CGT exempt amount; you pay CGT only on your total net gains above £3,000 across the year (it’s not a per‑asset threshold). Most private cars are exempt.

The rate of Capital Gains Tax you pay depends on your income tax band, and applies to gains above the annual exempt amount (£3,000 for individuals). For disposals on or after 6 April 2025, gains falling within your unused basic‑rate band are taxed at 18%, and gains above that are taxed at 24%. This applies to most chargeable assets, including residential property that isn’t your main home, shares, and unwrapped funds/OEICs. Certain assets and situations are exempt or have specific rules, so check how your holdings are treated. 

Because rates differ for residential property versus other assets, and because the £3,000 exempt amount applies to your aggregate gains, consider the order and timing of disposals, loss‑offsetting, and using both spouses’/civil partners’ annual exempt amounts where appropriate.

Tax planning can be a complex area, and it’s important to understand your options. Engaging with a tax professional can be beneficial, as they can assess your individual situation and make recommendations to support you.

This article is for information purposes only. It is not intended as investment advice.

The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors might not get back their initial investment.

Schroders Personal Wealth do not provide LISAs or Cash ISAs.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Also, in this article we refer to the tax rate and thresholds set for England and Northern Ireland, these may differ for the devolved nations of Scotland and Wales.

Schroders Personal Wealth does not provide personal tax advisory or tax compliance, however we can introduce you to a relevant specialist.  We might receive a referral fee from some of the partners we introduce to you.