Why you could pay more tax in 2026/27 and how to mitigate a potential rise

6 April often brings a range of changes to the UK’s tax regime – and 2026 is no exception.

As the new tax year approaches, you might be thinking about how you can mitigate rising tax bills in 2026/27.

From rising rates to frozen thresholds, there are multiple reasons you could see your tax liability rise in the year ahead. But by acting now, you could help mitigate the impact of upcoming changes and reduce the amount you pay to HMRC.

Read on to learn why you could pay more tax in 2026/27 and the steps you might take to mitigate the increases.

 

Frozen Income Tax thresholds could see more people move into a higher tax bracket.

The thresholds that determine your marginal rate of Income Tax haven’t risen with inflation since they were frozen in 2021. While the freeze was initially planned to end this year, it has now been extended to at least 2031.

As a result, more people are moving into a higher tax bracket as their income rises.

The table below shows what the current tax thresholds would have been in 2025, according to MoneyWeek, had they risen with the Consumer Prices Index.

Tax band	2026/27 income threshold	If adjusted for inflation	Tax rate
Basic rate	£12,570	£15,517	20%
Higher rate	£50,270	£62,059	40%
Additional rate	Over £125,140	Over £231,000	45%

In some cases, it might be appropriate to lower your adjusted net income to reduce your Income Tax bill, by increasing your pension contributions or donating to charity, for example. Although these steps might not increase your take-home pay, they could reduce the amount you pay to HMRC in some circumstances.

A financial planner can help you determine a suitable strategy for mitigating a rising Income Tax liability.

 

Dividend Tax rates are rising

For many investors and company directors, upcoming changes to Dividend Tax could see HMRC claim a larger portion of your returns.

From 6 April 2026, Dividend Tax rates will rise by two percentage points for taxpayers in the basic- and higher-rate Income Tax bands:

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%

Not only are some rates increasing, but, as described above, frozen Income Tax thresholds could see more taxpayers move into a higher tax band and face larger Dividend Tax bills.

However, investors may still be able to earn dividends tax-free by investing via a pension or ISA:

• Pensions: Funds held in a pension are invested, and dividend income within the fund is exempt from Dividend Tax (along with most other income types), as well as Capital Gains being free from tax. However, you generally won’t be able to access the funds until the normal minimum pension age, which is rising from 55 to 57 from April 2028.
• ISAs: Similarly, income and gains on investments held in a Stocks and Shares ISA or Innovative Finance ISA are also largely tax-free. You can invest up to £20,000 a year without your investment returns being taxed.

By investing via one of these tax-efficient methods, you could mitigate the impact of rising rates on your tax bill.

 

Changes to Capital Gains Tax could see some bills rise

In 2024, the lower rate of CGT increased from 10% to 18%, while the higher rate rose from 20% to 24%. So, in 2026/27, you could find that your gains are taxed at a higher rate than two years ago.

What’s more, upcoming changes could mean some investors and business owners will see their rates increase further. From 6 April 2026:

• Business Asset Disposal Relief, which reduces the CGT rate for qualifying asset disposals, will rise from 14% to 18%.
• Carried Interest, a share of investment profits paid to fund managers, will be subject to Income Tax instead of 32% CGT.

Each year, the Annual Exempt Amount allows you to earn capital gains of up to £3,000 without triggering a CGT bill. Unused allowance cannot be carried forward into the next year. So, you might consider planning your asset disposals to make the most of your annual tax-efficient allowance.

 

Frozen Inheritance Tax thresholds could see more of your estate go to HMRC

While the Inheritance Tax (IHT) rate hasn’t changed from 40% since 1988, the frozen nil-rate bands mean receipts continue to rise.

The nil-rate band is the value of your estate you can leave behind when you die without triggering an IHT charge. This is expected to remain at £325,000 until at least 2031, having already been frozen since 2009.

Because the threshold isn’t keeping pace with inflation, a larger portion of your estate could be subject to IHT when you die.

If you leave a primary residence to a direct descendant, you may also have a residence nil-rate band of up to £175,000. Not only is the value of this tax-free allowance being eroded by inflation, but as house prices rise, more estates could pass the £2 million threshold – at which point, you typically start losing your residence nil-rate band.

While your IHT liability may be rising over time, you may be able to mitigate your estate’s tax bill by:

• Gifting your wealth: Typically, gifts made more than seven years before your death or up to the £3,000 annual allowance (or other exempt gift allowances) are excluded from your estate for IHT purposes.
• Leaving a charitable legacy: Donating 10% or more of your net estate to charity, which is itself free from IHT, could mean your taxable estate is subject to IHT at a rate of 36%, rather than 40%.
• Using trusts: Some trusts can help mitigate your IHT bill. The options are complex, so it’s often worth consulting with a financial planner before making irreversible decisions.

By working with a financial planner to create a tax-efficient estate plan, you could help ensure more of your wealth ends up in the hands of your loved ones, rather than HMRC.

 

Get in touch

If you’re worried about rising tax liabilities in 2026/27 and beyond, get in touch to find out how our financial planners could support you with tax planning.

Email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.

 

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, tax planning, or trusts.

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.

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.