Metis AM
In the Autumn 2025 Budget, the chancellor announced numerous changes to the UK tax system.
Amid assertions that taxes would not rise for “working people”, the government has cast the tax net wider with a series of policy announcements aimed at boosting revenue.
While rates have increased in some cases, some tax liabilities may rise at the hands of frozen tax thresholds. This can mean that, despite the tax rates remaining unchanged, your bills could rise as a larger portion of your wealth becomes subject to taxation.
Read on to learn three key reasons your tax bill could rise in 2026 and beyond, and the practical steps you could take now to mitigate higher tax liabilities.
1. Frozen Income Tax thresholds could erode your take-home pay
Although Income Tax rates are not set to increase in 2026, your tax bill may still rise in the year ahead.
The thresholds determining your Income Tax rate have been frozen since April 2021. The freeze was originally expected to end in 2026, before being extended to 2028. The most recent announcement means the Income Tax thresholds are not expected to increase until at least 2031.
| Tax band | Income bracket | Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
As your income rises, a larger portion could become subject to tax or be pushed into a higher tax bracket – an effect known as “fiscal drag”.
The Personal Allowance allows you to earn up to £12,570 a year without paying Income Tax. Had it risen with inflation since 2021, the Guardian reports that, by 2031, the Personal Allowance would be £4,900 higher. Meanwhile, the threshold for becoming a higher-rate taxpayer would be £20,100 higher, meaning you wouldn’t pay the 40% rate until you earned more than £70,370.
What’s more, MoneyWeek reports that 2.3 million people could fall into the “60% tax trap” by 2028/29, compared to 1.8 million in 2024/25. This is when income between £100,000 and £125,140 is effectively taxed at 60%, as you lose £1 of your tax-free Personal Allowance for every £2 your income exceeds £100,000.
Mitigating your Income Tax bill
Depending on your circumstances, there are a number of steps you could take to improve your tax efficiency. For example, you might consider:
- Paying into your pension to reduce your taxable income
- Ensuring that you claim tax relief at the higher and additional rates (40% and 45%) if possible
- Making charitable donations, again reducing your taxable income.
Income from savings, investments, property, and other sources may also be included in your taxable income. As such, you might consider:
- Using ISAs to keep interest and investment earnings tax-efficient
- Timing savings maturation and investment income to keep annual earnings below an Income Tax threshold
- Adjusting your investment portfolio to focus on capital gains.
These options will not be appropriate for everyone. By assessing your needs and financial circumstances, a financial planner could help improve your tax efficiency to mitigate the impacts of the frozen Income Tax thresholds.
2. Your estate’s Inheritance Tax liability could be rising
Similarly, your Inheritance Tax (IHT) liability may increase due to frozen tax thresholds.
The nil-rate band exempts the initial £325,000 of your estate from IHT. Meanwhile, the residence nil-rate band could provide an additional tax-free allowance of up to £175,000 if you leave a primary residence to a direct descendant.
These thresholds have remained unchanged since 2009 and 2020, respectively, and are expected to stay frozen until April 2031.
According to figures reported by IFA Magazine, if the nil-rate band had kept pace with inflation, it would have been £503,994 in April 2025. The residence nil-rate band would have risen to £217,716.
As you accumulate wealth and the value of your assets increases, a larger portion of your estate could be subject to IHT after you pass away, leaving a smaller amount to loved ones.
Mitigating your estate’s IHT bill
With comprehensive estate planning, you may be able to reduce your estate’s IHT liability and pass more of your wealth to loved ones. Some measures you might consider include:
- Taking both your own and your spouse’s nil-rate bands into consideration
- Gifting your wealth early (IHT may still be charged if you pass away within seven years)
- Using your annual gifting exemption (£3,000 in 2025/26 and 2026/27), as well as other tax-efficient gifting allowances
- Donating 10% of your estate to charity, which may reduce your IHT rate from 40% to 36%
- Using trusts to ringfence assets from IHT
- Claiming 50% or 100% Business Relief on qualifying assets, subject to thresholds and holding periods. While generally this applies to business assets, investments such as shares in companies listed on AIM can qualify for Business Relief.
The IHT regime is complex, so finding the most appropriate solution for your estate might not be straightforward. By working with a financial planner, you can devise an estate plan that suits your circumstances and goals.
3. Rising Dividend Tax rates could diminish your returns
Dividend Tax has changed over recent years. Not only are the rates increasing, but the tax-efficient allowance has been significantly reduced.
When the Dividend Tax allowance was first introduced in 2016, it allowed shareholders and business owners to earn up to £5,000 in dividends tax-free. In 2026, the allowance stands at just £500.
Many business owners and shareholders are therefore seeing a larger portion of their dividends subject to tax due to the reduced allowance. This year, basic- and higher-rate taxpayers may also see Dividend Tax bills rise further as rates increase from April 2026.
| Tax band | 2025/26 rate | 2026/27 rate |
| Basic rate | 8.75% | 10.75% |
| Higher rate | 33.75% | 35.75% |
| Additional rate | 39.35% | 39.35% |
Once these changes are in effect, AJ Bell reports that some rates will have increased by over 10% in 10 years, with higher-rate taxpayers seeing Dividend Tax rise from 25% to 35.75% since 2016.
If your total annual earnings are less than your £12,570 Personal Allowance, you typically won’t be charged Dividend Tax.
Mitigating your Dividend Tax bill
In some cases, you may be able to limit the impact of rising Dividend Tax rates by adjusting how and when you earn dividends. For example, you might consider:
- Investing through a Stocks and Shares ISA, which generally allows you to invest up to £20,000 a year (2025/26 and 2026/27) without paying tax on investment returns or dividends
- Investing through a pension, where growth is typically ringfenced from taxation
- Transferring some investments to your partner to utilise their Dividend Tax allowance
- Adjusting your investment portfolio to reduce dividends and increase capital gains, which are usually tax-free up to the Annual Exempt Amount (£3,000 in 2025/26)
- Timing your dividend payments to make use of multiple years’ allowances if you are drawing them from a business.
Speak to a financial planner for help designing a dividend strategy suited to your needs.
Get in touch
At Metis Wealth, our financial planners could help you mitigate rising tax liabilities with a bespoke financial plan tailored to your unique circumstances and goals.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals 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 estate planning, cashflow planning, tax planning, or trusts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.