Millions of individuals are set to face higher tax payments in 2026, but there are strategies available to reduce your tax burden. Sarah Coles, the head of personal finance at Hargreaves Lansdown, delves into the details to help you navigate through these upcoming changes.
According to Coles, taking proactive steps early on can help mitigate the impact of the looming tax increases in 2026.
The personal allowance, the threshold before income tax kicks in, has been fixed at £12,570 until 2031. This means that as your earnings grow, you might find yourself pushed into a higher tax bracket.
Come April 2026, the dividend tax rate is set to rise. Basic rate taxpayers will see it climb from 8.75% to 10.75, while higher rate taxpayers will experience an increase from 33.75% to 35.75%. Additionally, the tax relief for venture capital trusts will be reduced from 30% to 20% in the same period.
Inheritance tax thresholds will remain unchanged at £325,000 for the nil rate band and £175,000 for the residence nil rate band until 2031. The annual gift allowance for inheritance tax is also stagnant at £3,000.
Council tax is expected to escalate in April 2026. In England, local authorities can boost council tax by up to 5% each tax year without the need for a referendum.
Beginning September 2026, the 5p per litre reduction in fuel duty introduced by the Conservative government in March 2022 will gradually revert to its original levels, reaching pre-March 2022 rates by March 2027.
Alcohol duty will be adjusted in line with the Retail Prices Index (RPI) inflation starting February 2026. A one-time surge in tobacco duty, previously announced in the 2024 spring Budget by Jeremy Hunt, will also be implemented. Tobacco duty typically increases in November by RPI inflation plus two percentage points.
Starting October 2026, a new duty of £2.20 per 10ml of vaping liquid will be imposed on vaping products.
Coles outlines five legal methods to reduce your tax bill in 2026. Firstly, she recommends maximizing ISA saving accounts, allowing you to save up to £20,000 annually tax-free. Secondly, consider contributing to a pension, with potential tax relief at your highest marginal rate. Additionally, utilizing salary sacrifice can lead to tax and National Insurance savings. Transferring income-producing assets between spouses or civil partners can also avoid triggering a tax bill. Lastly, married couples where one partner is a non-taxpayer and the other is a basic rate taxpayer can benefit from the marriage allowance, enabling the non-taxpayer to transfer a portion of their personal allowance to their spouse.