Six tips for higher rate taxpayers ahead of the Budget

Sarah Coles, Head of personal finance, AJ Bell. Croner.

Sarah Coles, head of personal finance at AJ Bell, says it’s important to filter out the Budget noise but there are ways to make some efficient tax savings before the big day.

There are lots of sensible ways to save tax that people can use before the Budget on 28 October. A higher rate taxpayer could save up to £8,500 by combining tax savings from six scenarios such as paying a lump sum into a pension to generate valuable pension tax relief, maximising the annual ISA allowance before it is cut next April, and making use of capital gains allowances.

Waiting for the Budget to drop can be a nerve-wracking experience, as people worry it might land them with a bigger tax bill in the years to come. But rather than just bracing for impact, it’s worth using this opportunity to take some positive steps to save tax, regardless of whatever the Budget holds in store.

Under current rules there are six steps that could leave a higher rate taxpayer as much as £8,500 better off over the course of a year. Depending on what has already been used in the current tax year, they are all worth investigating to see what you could save.

1. Pay a lump sum into your pension

Most people can pay up to £60,000 into a pension in the current tax year – or an amount that’s equal to their total income. Few people can stretch to that, but it’s worth considering whether to boost contributions and shield more income from the taxman.

If you get a windfall, such as a bonus or any other kind of lump sum, you could consider paying it into your pension for a tax-efficient boost overnight. You can get tax relief at your highest marginal rate.

Saving: Someone getting a £10,000 windfall could put it all into their pension. A basic rate taxpayer could get £2,500 in tax relief, and a higher rate taxpayer up to £5,000 if they claim for higher rate tax relief.

2. Boost your pension contributions

With any pay rise or job change, you could ask to pay more into your workplace pension, or increase contributions to a private pension, so the tax relief saving builds over time – along with retirement resilience.

Saving: Someone could decide to set aside an extra £100 a month for their pension, which could save a basic rate taxpayer another £300 through basic rate tax relief a year and a higher rate taxpayer £600 – provided they have not already used their annual allowance.

3. Take advantage of your capital gains tax allowance 

If you have investments outside ISAs and pensions, you could be building a capital gains tax (CGT) liability as your investments grow, so it can make sense to realise gains up to your annual £3,000 allowance each tax year.

It is then possible to use the Bed and ISA process to sell and buy the same assets within an ISA, which protects them from CGT and dividend tax in future too. It’s worth bearing in mind that if you do this without moving into an ISA, you cannot buy back exactly the same assets within 30 days, or HMRC will treat them as not being sold at all.

4. Use a Cash ISA

In the current tax year, there is a £20,000 Cash ISA allowance for everyone, but it drops to £12,000 for those under the age of 65 in April 2027 – so it pays to take as much advantage as makes sense for your finances now.

Outside a Cash ISA, a basic rate taxpayer has a £1,000 savings allowance, a higher rate taxpayer has £500, and an additional rate taxpayer has £nil. In the current tax year 2026-27, savings tax is paid at your income tax rate, but this is changing soon. From 6 April 2027, for tax year 2027-28 this rate will rise by an additional 2%. Someone without sufficient £20,000 ISA allowance can give the money to their spouse and use theirs – to maximise the total tax saving within a couple.

Saving: If someone has £20,000 in a Cash ISA paying 4.5% interest after a year, annual interest would be £900. If the interest is paid at the end of a 12-month fix, by using a Cash ISA a higher rate taxpayer would save £160 and an additional rate taxpayer £405 at the current tax rates, compared with if they held the money in standard savings account.

5. Use a Stocks and Shares ISA

If you invested £20,000 outside of an ISA and made 5% for one year before selling up, you would not exceed your £3,000 capital gains tax allowance. CGT savings through investing in an ISA would come to those who had invested for longer and those with larger portfolios. However, you could save dividend tax in the first tax year of investing, if you have already used up and invested your £20,000 annual Stocks and Shares ISA allowance.

Saving: If you made 4% in dividends a year on a £20,000 portfolio, that would add up to £800. After the £500 annual allowance, you would save dividend tax on £300, which for a basic rate taxpayer would be £32.25, a higher rate taxpayer £107.25, and an additional rate taxpayer £118.05.

6. Use tax-free childcare

This can be put towards childcare, or wrap-around care and holiday clubs for children aged 11 and under. For every £8 a parent pays into the childcare account, the government adds another £2 – up to £2,000 per child each year. The provider is then paid direct from the account. However, if someone (or their partner) earns more than £100,000 in adjusted net income a year, they cannot claim tax-free childcare.

Saving: You can put in up to £2,000 every three months, and get £500 from the government each time – so this side of the Budget you could be £500 better off, and over the course of a year this adds up to £2,000.

About the author

Sarah Coles is head of personal finance at AJ Bell