According to experts, UK households have a way of lowering their tax bands – because pensions offer one of the best ways to reduce taxable income while building wealth.

UK households are being handed lower tax bands just weeks out from the new tax year. According to experts, UK households have a way of lowering their tax bands – because pensions offer one of the best ways to reduce taxable income while building wealth.

Contributions receive tax relief at your highest tax rate. Basic-rate taxpayers get 20% tax relief (e.g. £1,000 contribution costs £800), higher-rate taxpayers get 40% relief (e.g. £1,000 contribution costs £600) and additional-rate taxpayers get 45% relief (e.g. £1,000 contribution costs £550).

Take the example of a worker who earns £90,000 per year and contributes £10,000 to their pension. This reduces the taxable income to £80,000, saving £4,000 in tax, personal finance gurus and consumer champions have revealed.

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Over time, tax-free compounding inside his pension grows his retirement savings faster. If you’re married, or in a civil partnership, and one of you earns less than the personal tax allowance threshold, a portion of this unused allowance can be transferred to your partner. This reduces the amount of tax the partner is liable to pay. Should both partners in a marriage earn over the marriage tax allowance, this allowance is removed.

Basic rate taxpayers can earn up to £1,000 in interest on savings without paying tax. For higher-rate taxpayers, the allowance is £5002. Individuals can contribute £20,000 per tax year into ISAs, with any interest, income, or capital gains earned within an ISA account being exempt from tax. This means you can take an unlimited income from investments held in an ISA without being taxed.

While you cannot increase your personal tax allowance specifically, there are several other allowances and strategies that you can use to effectively reduce the amount of tax for which you are liable. The personal allowance is the amount of income you can earn before paying tax.

The allowance is the same whether you are employed, self-employed, or retired. In the UK, this personal allowance has been frozen at £12,570 until April 2028.