Is it ever worth declining a pay rise to avoid higher Income Tax?

If you’ve recently had a pay rise, amid the excitement you may be worried about paying a higher rate of Income Tax, whilst losing some valuable benefits.

Indeed, with Statista reporting average wage growth of 4.7% in July 2025 and Income Tax thresholds remaining frozen, this concern is becoming increasingly common. In fact, Sky News reports that people in the UK are rejecting pay rises to avoid moving into a higher tax bracket.

But rather than turning down a salary increase, you may be able to use a portion of your income in other ways to avoid paying too much tax and losing valuable benefits.

Read on to explore what you need to know about UK Income Tax, plus your options for accepting a salary increase without seeing your tax bill rise dramatically.

Income Tax thresholds are frozen until 2028

As of 2025/26, the thresholds that determine your Income Tax rate are frozen until April 2028 at the following levels:

• Personal Allowance (0%): Up to £12,570
• Basic rate (20%): £12,571 – £50,270
• Higher rate (40%): £50,271 – £125,140
• Additional rate (45%): Over £125,140

With these thresholds being frozen since 2021, more people are moving into higher tax brackets as their wages rise. In fact, MoneyWeek reports that 12 million people could move into the higher rate by 2027/28, whilst a further 2 million will start paying the additional rate.

Whilst some people believe that their entire income will be subject to the higher rate, this is not the case. For income below £100,000, each rate is applied to the income that falls within the relevant bracket.

For example, if you earned £60,000, you would pay:

• 0% on the first £12,570
• 20% on income between £12,571 and £50,270
• 40% on income over £50,270

So, you’re unlikely to see your income massively reduced by moving into the higher-rate bracket, with only some of your income subject to the increased rate.

Salaries over £100,000, however, are an exception to this rule.

A portion of your income over £100,000 is subject to an effective 60% tax rate

As your salary rises, it’s not just tax brackets you need to be wary of. Those earning between £100,000 and £125,140 often fall into something known as the “60% tax trap” as the Personal Allowance starts tapering down.

For every £2 you earn above the £100,000 threshold, the amount you can earn tax-free reduces by £1. This threshold hasn’t changed since 2017, despite wages rising by 43.2% between 2015 and 2024, as Sky News reports.

Every £1 lost from your Personal Allowance will be added to your taxable income at your marginal rate, resulting in an effective tax rate of 60% on earnings over £100,000 up to £125,140.

As an example, if you earned £110,000:

• You pay 40% tax on the £10,000 over the £100,000 threshold (£4,000)
• You lose £5,000 from your Personal Allowance
• You pay 40% tax on that £5,000 (£2,000)
• In total, you pay £6,000 in tax on the £10,000, an effective rate of 60%.

Once your earnings reach £125,140, you lose your entire Personal Allowance and enter the additional-rate tax band.

Parents could lose out on valuable benefits when earnings rise

If you have children, you may see your Government funding and benefits reduced, or even removed entirely, as your income increases.

Child Benefit

As of 2025/26, parents with children under the age of 16 can typically claim child benefit of £1,354.60 a year for their first child, plus £897 for their second and subsequent children.

However, if either parent earns more than £60,000 a year as adjusted net income, you may have to pay some or all of your Child Benefit back via a tax charge. The High Income Child Benefit Charge reduces your Child Benefit by 1% for every £200 your income exceeds £60,000, with the benefit removed entirely once you earn £80,000.

That said, it will generally still be worth accepting a higher salary, as the financial advantages normally outweigh the cost of Child Benefit reductions.

Government-funded childcare

Since September 2025, children over nine months old are typically entitled to 30 hours of funded childcare up until they reach school age – provided both parents are working.

But this funding drops off a cliff edge if either parent individually earns over £100,000 as adjusted net income. Whilst those earning £100,000 can claim the free hours, £1 more could see your entitlement reduced to just 15 hours a week, and only for children aged three and four.

According to the Independent, as of October 2025 the average cost of full-time childcare in a day nursery was £285.31 a week. So, tipping over the £100,000 threshold could see you facing costs upwards of £14,000 a year for each child in need of full-time childcare.

Salary sacrifice can help you avoid paying higher tax and losing valuable benefits

These schemes generally deduct payments from your salary before tax is calculated, meaning you may be able to avoid passing a threshold.” Needs rewording e.g. “As the name suggests, salary sacrifice means giving up some of your salary in return for other benefits from your employer. Typically, the personal pension contributions deducted from your salary are replaced by higher employer contributions. This may then mean you are able to avoid passing a tax threshold.

As reported in Sky News, a parent living outside London with two children under school age would need to earn £137,000 before they had as much disposable income as when they earned £99,000.

However, with careful financial planning, you may be able to avoid falling into the 60% tax trap, losing valuable benefits, or moving into a higher Income Tax threshold.

Salary sacrifice schemes

By enrolling in salary sacrifice schemes through your workplace, you can often reduce your adjusted net income whilst still gaining value from your pay rise. These schemes generally deduct payments from your salary before tax is calculated, meaning you may be able to avoid passing a threshold.

Not every employer will offer salary sacrifice schemes, but it may be worth asking what is available before rejecting a pay rise. However, remember not all workplace benefits can reduce your adjusted net income. If the benefit being obtained using salary sacrifice isn’t one of the exempt benefits such as employer pension contributions, a value will still be included in your adjusted net income.

Pension contributions

Increasing your personal pension contributions can effectively increase the threshold at which the loss of Personal Allowance, Child Benefit or Government-funded childcare are lost. Your contributions are typically deducted from your salary before Income Tax is calculated. This can have the effect of keeping your taxable income below a higher threshold

By increasing your contributions, you may therefore be able to avoid paying a higher tax rate or losing childcare benefits. Additionally, it could help boost your retirement income. Many employers will match contributions up to a certain level, and by paying more into your pension early you could boost your compound investment returns.

If you’re worried that a pay rise could tip you over into a new tax threshold or into the 60% tax trap, a Financial Planner could help you define a strategy that makes the most of your income, allowing you to stretch your pay rise further rather than reject it.

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Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.