Beating the frozen tax bands

Introduction, Kimberley Dondo   0:00 – 00:44
Hello and welcome to Money Talks a collaborative podcast series from Money Marketing and Royal London. I’m your host Kimberley Dondo and today we are tackling a growing challenge for advisers and their clients – Beating the frozen tax bands. With key tax thresholds locked in until April 2031, millions more people will be caught by fiscal drag or complex tax traps. Thankfully, there are practical ways to manage this. Joining me to unpack exactly how we can navigate these hurdles are Fiona Hanrahan and Justin Corliss from Royal London.

Kimberley Dondo   0:45 – 01:07
Once again I’m joined by Justin and Fiona, both from Royal London, thank you both for joining me.

Fiona Hanrahan   01:07 – 01:09
Hi there, you're welcome.

Justin Corliss   01:09 – 01:11
Thanks for having us.

Kimberley Dondo   01:11 – 01:37
So we have recently had the spring statement, but with what we're talking about, there isn't really much to update or report on. But in the last budget in November, Rachel Reeves announced that tax bands will remain frozen until April 2031. So why do you think it's important for us to talk about this?

Justin Corliss   01:38 – 03:03
Hi, Kim. Look, just so that we're clear on what the Chancellor announced in the 2025 budget speech, it was announced that the personal allowance of £12,570 and the basic rate limit of £37,700 will remain frozen until the 5th of April 2031. Now, the personal allowance applies to the whole of the UK, but Scotland can and could vary their income tax rates and limits. Now, the National Insurance upper earnings limit of £50,270 has also been fixed until 5th of April, 2031, and this is UK wide. So back to your actual question. If the tax bands are frozen for another five years, it will mean more people will pay tax for the first time and more people will pay higher rates of tax.

Now, the government's own estimate on the date of the budget was that this measure would raise additional tax of just over 12 billion in 2030-2031. Now, you'll sometimes hear this concept described as fiscal drag, and this just means taxpayers are pushed into higher tax brackets as a result of thresholds being frozen.

Kimberley Dondo   03:04 – 03:09
Right. So other than fiscal drag, are there any other consequences?

Justin Corliss   03:10 – 04:20
Yes, other than simply the tax bands being frozen, there are other issues or tax traps. And by that, I mean a level of earnings where you pay more tax than the headline rate or more than you'd expect. Now, this happens when you earn between £100,000 and £125,140, where you lose some or all of your personal allowance, or it can happen if you or your partner earn above £60,000 and receive child benefit. Now the £100,000 or the £60,000 we're talking about there haven't technically been frozen until 2031, but there's no expectations that these figures will change.
There is also an issue if you earn over £100,000 and receive funded childcare. You will lose all of this benefit if you earn over £100,000 so this could be a big issue for those parents and one that we've covered in webinars and articles over the last couple of months.

Kimberley Dondo   04:21 – 04:28
Right, okay. So is there anything an adviser can do to help a client in one of these situations?

Fiona Hanrahan   04:29 – 05:44
Hi there. Yes, absolutely. Whilst the situations are different, Justin just talked about them there, the solution we're talking about is similar and it revolves around an understanding or at least an appreciation of adjusted net income. And your adjusted net income is used to establish how much tax you pay as well as determines your eligibility for funded childcare that we mentioned and whether you need to pay the high income child benefit tax charge. And the good thing or the thing we're going to focus on today is that the payment of a pension contribution reduces your adjusted net income and therefore reduces your income for the purposes of paying tax; paying the child benefit tax charge, being below £100,000 limit for funded childcare, as well as the personal allowance tax trap. It's definitely worth seeing here that adjusted net income, what we're talking about here, is different from net income that we talk about when we're talking about the tapered annual allowance. So these are different things and are calculated differently.
In a nutshell, adjusted net income is total taxable income before any personal allowance, unless certain reliefs that we'll talk about. And pension contributions are one of those reliefs we get to deduct. And if you've paid those contributions net, it's the gross amount that you get to deduct.

Kimberley Dondo   05:46 – 06:00
Right. And you both clearly are far more knowledgeable than I am. So how do you work out your adjusted net income?

Fiona Hanrahan   06:01 – 09:02
So first of all, you work out your net income and then you adjust it. And I know I've just basically repeated what the definition is, but it's important. So net here does not mean net of tax as you might expect. So again, that's another confusing aspect. So to work out your net income or your sort of total income really, you're adding up all of your taxable income and you include things like money you earn from your employment, including any benefits that you get from your job that are taxable, profits you make if you're self-employed, and that would include any from services you get through selling through websites or apps. Some state benefits, the taxable ones, most pension income, and that would include the state pension, company and personal pensions and retirement annuities as well. Interest on savings and pensioner bonds, dividends from company shares, some rental income, income from a trust, foreign income. So that list isn't exhaustive, but that's most of them.
So that's your net income and then you take off any reliefs. One of the biggies is payments made gross to pension schemes. In other words, those that have been made without tax relief being added on later. And trading losses, for example, trade loss relief or property loss relief. And that's your net income.
And then you adjust it. So to arrive at your adjusted net income, you get to take off any gift aid donations. So, if you have made gift aid donations, you take off the grossed-up amount. And if you have made a gift aid donation, you will be told that information. So, it's what you've paid plus the basic rate of tax. So, the easiest way to work that out is for every pound of gift aid donation you've made, you take £1.25 from your net income, and then you get to take off pension contributions. So, if you've made contributions to a pension scheme where the provider has added on basic rate tax of 20%, for every £1 of pension contribution you make, you take £1.25 from your net income.

So, that's the big one really that we're focusing on today. And lastly, you get to add back tax relief for payments made to trade unions or police organisations and tax relief of up to £100 is available if you make payments to a trade union or police organisation for superannuation. So you would know who you are if that was you. Or it could be for life assurance or funeral benefits.
And if you've taken off an amount for that at the start, you would add it back here, depending on where you include it in the calculation, but you should. And then after all of that, you'll have arrived at your adjusted net income. And I know that does sound like a lot of detail, but what we really want to focus on is the impact paying a pension contribution has.
Remember, we said that this reduces your adjusted net income. So a pension contribution has the benefit of not only increasing your retirement provision, it reduces your tax bill, as well as potentially getting you out of one of those tax traps that Justin mentioned.

Kimberley Dondo   09:02 – 09:17
And sometimes these concepts can be quite theoretical and difficult to understand. So do you think it's worth looking at an example or a case study to help further explain?

Justin Corliss   09:18 – 14:45
Yes, both of those things I will say yes to. Yes, it can be a little bit difficult to understand and yes, a case study is definitely worthwhile. We get feedback all the time saying that advisers like case studies. Now, the high income child benefit tax charge is a really good one to focus on, I think. This will impact anyone with adjusted net income over £60,000 who receives child benefit. Remember though, this concept applies to the other tax traps that we've mentioned as well.

Now when it comes to child benefit, the rules are that you or your partner may have to pay a high income child benefit tax charge if either of you receives child benefit and at least one of you earns more than the threshold, which is currently £60,000. This means you will have to pay some or all of your child benefit back, or actually technically you'll have a tax charge which will cancel all or some of it out.
Now, the charge may also apply if someone else gets child benefit for a child living with you and contributes at least an equal amount towards the child's upkeep. It doesn't matter if the child living with you is not your own child.
Now, the income threshold above which you start to pay the tax charge is £60,000, and your tax charge will equal the total amount of child benefit if you earn £80,000 or above. Now, you'll pay back 1% of your child benefit for every £200 you earn.
over that £60,000 threshold. If your adjusted net income is over the threshold and so is your partner's, then whoever has the higher income is responsible for paying the tax charge. Partner means someone that you're not permanently separated from, who you're married to, in a civil partnership with or living as if you were. If you do need to pay the charge, you can pay this through PAYE and have your tax code adjusted or pay it through self-assessment if you complete one of those.
Now, let's put some figures to that. I don't want to get too hung up on the figures. It's really the concept that we're trying to ensure that everyone can grasp.

But Maria, let's say, is 40 and lives in England, and she has adjusted net income of £70,000 and she is the higher earner in the household. She's extremely lucky in that she has four-year-old triplets, who she claims child benefit for of £3,148. Now, as her income is £70,000, she's halfway between £60,000 and £80,000 parameters.
where she starts to face a tax charge to cancel out the child benefit and loses it completely. So at the moment, her child benefit tax charge is £1,574, half of the £3,148 because she's halfway between the two figures. So, for the £10,000 she earns over £60,000, she is paying higher rate tax of 40%, national insurance of 2%, and the child benefit tax charge of £1,574. So, from that £10,000, she sees £4,226 net, or has a tax rate of 57.74% if you prefer. So in other words, pretty big.
So what's the impact then of paying a pension contribution? So if Maria pays a net pension contribution of £8,000, this will be grossed up immediately by the provider to £10,000. This is how the basic rate tax relief would be awarded.
She could then claim the additional £2,000 in higher rate relief, meaning 40% in total. Plus, as the payment of the pension contribution would reduce her adjusted net income to £60,000. Remember, we start with £70,000 total income, then reduce it by the gross pension contribution of £10,000. She will not face the child benefit tax charge of £1,574, so the total tax relief received on this contribution was £5,574, £20,00 basic rate tax relief, £2,000 higher rate tax relief, plus the £1,574 that she no longer has to pay in high-income child benefit tax charge. So, in other words, that is 69.68% relief. So this is £5,574 divided by the £8,000 that she contributed.
So, my goal of this happened.
So if Maria can afford to pay a contribution of £8,000, there's a pretty positive outcome here. It not only increases her savings for retirement, and we mustn't overlook that, but reduces her tax bill significantly.

Kimberley Dondo   14:45 – 15:05
And that's why I love case studies, because now I understand this concept. So thank you for that. But that seems great in theory. But what if Maria can't afford a contribution of £8,000, especially in this current economy?

Fiona Hanrahan   15:06 – 17:52
Yes, I agree. Someone with triplets might unsurprisingly not have a spare £8,000, but the theory works even if someone else pays that pension contribution for you. And this is called a third-party pension contribution. And really for all purposes, it's just like you made that contribution yourself. In other words, you get the benefit of it boosting your retirement provision as you get to claim the tax relief on it too. So even though the person paying the contribution is paying it, it's not them that gets to claim that tax relief, that's yours or the recipient's.

So if we look at our case study again and we go back to Maria, she's still got her and she's still earned £70,000. As Justin looked previously at how effective her paying a gross contribution of £10,000 was she received tax relief and didn't have to pay the child benefit tax charge. If someone else makes that payment as a third-party contribution, then she still receives the tax relief and she still doesn't have to pay the child benefit tax charge a third party payment reduces adjusted net income as if you'd made that contribution yourself.

So let's add to our case study and Maria's dad, Martin, has a large pension fund of £750,000 in drawdown after taking his tax-free cash and he's got sufficient income for his needs and he's keen to reduce his estate during his lifetime by making tax efficient gifts, particularly with pensions being subject to inheritance tax from the 6th April 2027. So thinking at what Martin could do then, firstly, he could use the normal expenditure rate of income exemption as well as perhaps the annual exemption to make third party contributions to help Maria out. The net pension contribution is the amount of gift for inheritance tax purposes here, so it would be £8,000. So, adding on the tax release she'll receive, as well as not paying the child benefit tax charge to the IHT saving, means that there's even more tax saved if it's a third-party payment that's made. If Martin makes that net contribution of £8,000 into Maria's pension scheme, she'll get again that basic relief of £2,000, the high rate relief of £2,000, and she'll save the child benefit tax charge of £1,574. That's the exact same figures as before.

But if we add on the inheritance tax savings of £3,200, that's 40% of the net gift, which is £8,000. This is total tax relief of 109.68%, in other words, very worthwhile. And I hope that kind of shows the benefits of paying a pension contribution to help an income tax bill and just making that money work a little bit harder, I think, as well as the potential IHT savings too. And I think this situation or this case study is really a combination of the two hottest topics in pensions, frozen tax bands as well as inheritance tax.

Kimberley Dondo   17:53 – 18:11
Yeah, definitely. I think it also has the intergenerational and is probably, it's probably why advisers should make sure that the whole ecosystem of a family is involved because then, you know, you can make these efficient.

Fiona Hanrahan   18:12 – 18:14
Yeah, definitely. You've got it, you're so correct, yeah, definitely.

Kimberley Dondo   18:15 – 18:18
Yeah. But is there anything else we should mention?

Justin Corliss   18:19 – 20:39
Yes, there is. We often read about the numbers of individuals failing to claim tax relief. I don't know if any of the listeners have seen that. I imagine they probably have. If tax bands are frozen until 2031, then the tax relief not being claimed will presumably only increase each year too. As a reminder, then, you can claim tax relief through your tax return. You can make a standalone claim online too at any time in the tax year, or you can write to HMRC. Now, up until the 1st September last year, 2025, so pretty recently, it was possible to phone HMRC to do this but that's no longer an option. Remember, if you pay into someone else's pension, Fiona mentioned this a couple of times, it's the recipient who has to claim the relief if it's above basic rate. And remember, this is really important, the extra bands in Scotland. You know, your clients could be entitled to that 1% tax relief if they're paying tax at 21%. As you can make it a standalone claim, fear of completing self-assessment shouldn't really be a reason for not claiming the tax relief that you're due.
Now, we've talked a lot about salary sacrifice recently due to the changes coming in 2029. And Fiona and I have covered this off in various webinars. Well, Fiona has in the January webinar that Royal London run. If you want to go back and have a listen to that on our CPD site.

But it's worth mentioning here as one of the benefits of salary exchange is that your contributions are converted to employer pension contributions and paid gross. So you get your tax relief immediately. There's no need to wait or claim it later on. This benefit of salary sacrifice will remain after 2029 as there is no change to the tax relief on pension contributions. The change only relates to the national insurance savings available from salary exchange. This will be capped at £2,000 from April 2029.

Kimberley Dondo   20:40 – 20:48
Okay. And just before we actually wrap up, what should our main takeaways be from today's podcast?

Fiona Hanrahan   20:49 – 21:28
I would say the frozen thresholds are a bigger issue than you might realise. More will be paying tax for the first time and more will be paying higher rates of tax. And, you know, we're talking about a freeze lasting five years, remember. We've shown today how a pension contribution can reduce the amount of tax you pay but also get you out of some tax traps. We focused on the high income child benefit tax charge, but remember that same theory applies to tax-free childcare and the personal allowance tax trap too. But it would also apply simply to those in higher tax bands making pension contributions to reduce their adjusted net income to below that higher tax band or simply save some tax.

Kimberley Dondo   21:29 – 21:33
And where can advisers go for more information?

Fiona Hanrahan   21:34 – 21:43
There's loads of support on Royal London's Technical Central site, including articles and case studies, and we've covered this topic in our January and February 2026 webinars, which are on our CPD Hub.

Kimberley Dondo   21:44 – 22:03
Okay, great. I really enjoyed this episode. I weirdly relate to Maria A lot. I'm not 40 yet, and I do not have triplets. But who knows? Maybe by the time I'm 40, I will also be in Maria’s situation and needing to figure this out.

Fiona Hanrahan   22:04 – 22:07
I have twins Kimberley and that came as a shock, so I'm sure chocolate's good as well.

Kimberley Dondo   22:08 – 22:22
But it's good to know that there are ways to figure that out in the next five years. So thank you so much for speaking with me today, Fiona and Justin. As always, it was a pleasure.

Fiona Hanrahan   22:23 – 22:24
You're welcome.
Thank you. See you soon. Bye.

Justin Corliss   22:24 – 22:25
Thank you very much. Bye.

Kimberley Dondo   22:26 0
Thank you for tuning in to this episode of Money Talks, for more support, articles and details on case studies on everything we discussed today be sure to visit Royal London Technical Central site. You can also catch up on their recent January and February 2026 webinars over on the CPD hub.

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