3 costly tax mistakes to avoid in 2026/27

In the new tax year, many people in the UK could see their tax liability rise.

With the tax-free Personal Allowance and Income Tax thresholds set to remain frozen until at least 2031, you could see a larger portion of your earnings subject to tax as your income rises. In some cases, you could even move into a higher tax bracket.

According to figures from the Office for Budget Responsibility (OBR), by 2028/29 an additional 3 million people are expected to be paying the higher rate of Income Tax compared to 2022 levels, while 400,000 will move onto the additional rate.

As a result, you may now be looking for ways to mitigate your tax bills more keenly than ever.

However, the UK’s tax system is complex, making it easy to miss out on valuable tax-efficient options. In fact, IFA reports that 5.6 million people in the UK paid too much tax last year.

Read on to discover three common tax mistakes and how avoiding them could impact your tax bill in 2026/27.

Mistake #1: Not using your ISA allowance to save and invest tax-efficiently

According to MoneyAge, 8.6 million savings accounts are exposed to tax in the UK. In some cases, savers could be missing out on tax-efficient interest by not using an Individual Savings Account (ISA).

Indeed, research by The Investment Association found that less than a third of UK adults have a Cash ISA, while nearly 1 in 5 are unaware of Stocks and Shares ISAs.

When the interest earned in a non-ISA savings account exceeds your Personal Savings Allowance (PSA), Income Tax is generally charged at your marginal rate (as of 2026/27). Your PSA is determined by your tax band:

Tax band	Rate	PSA
Basic rate	20%	£1,000 a year
Higher rate	40%	£500 a year
Additional rate	45%	£0

 

Similarly, gains earned on investments made through a General Investment Account (GIA) may be taxed, depending on the type of income generated.

With ISAs, you can generally save or invest up to £20,000 a year without your money’s growth being subject to tax, as of 2026/27. You can use the full allowance in a single ISA or spread it across multiple account types, including:

• Cash ISA: Earn tax-efficient interest on savings
• Stocks and Shares ISA: Invest without being taxed on returns
• Innovative Finance ISA: Invest tax-efficiently in less liquid assets
• Lifetime ISA: Save for your first home or retirement and receive a 25% government bonus on contributions up to £4,000 a year.

It’s worth noting that, from April 2027, the Cash ISA allowance will effectively reduce to £12,000 a year for under-65s, with £8,000 for use in an investment ISA only.

Mistake #2: Not realising you’ve fallen into the 60% tax trap

When you earn between £100,000 and £125,140, a portion of your income is typically subject to Income Tax at an effective rate of 60%.

This is because for every £2 your annual income exceeds £100,000, you lose £1 of your Personal Allowance, which usually allows taxpayers to earn £12,570 a year tax-free.

Your lost Personal Allowance is taxed at 40%. This effectively means that 60p in every £1 over the £100,000 threshold goes to HMRC.

It’s not just your salary that counts towards this threshold. Your adjusted net income could include a variety of income sources, such as:

• Interest on savings
• Dividends
• Pension income
• Rental income
• Certain benefits, such as the State Pension.

As a result, without carefully tracking all your annual earnings, you could tip over into the 60% tax trap without even realising it.

Fortunately, you may be able to steer clear of the tax trap by reducing your adjusted net income – without needing to earn less.

Pension contributions are typically deducted from your adjusted net income. This can include payments into a workplace pension scheme via salary deductions or contributions to a private pension.

Similarly, some charitable donations can reduce your adjusted net income, such as when made using a payroll giving scheme.

If you’re approaching – or already in – the 60% tax trap, a financial planner can help you devise an appropriate strategy to mitigate your Income Tax bill.

Mistake #3: Not claiming your full tax relief entitlement on pension contributions

Generally, you can claim tax relief at your marginal rate when you pay into a pension.

As of 2026/27, tax relief is available on contributions up to the value of your annual earnings. However, it’s worth noting that contributions exceeding the £60,000 Annual Allowance are typically subject to tax charges, negating the benefits of tax relief.

Usually, tax relief is applied automatically at the basic rate of 20%. If you’re a higher- or additional-rate taxpayer, you can usually claim a further 20% or 25%, respectively, via a self-assessment tax return.

But many people are missing out on this opportunity to mitigate their tax bill. Pensions Age estimates that around 807,000 higher-rate taxpayers and 19,000 additional-rate taxpayers could be losing out on tax relief by failing to claim it.

Claiming your full tax relief entitlement can have a significant impact on your tax bill.

Let’s say you’re a higher-rate taxpayer paying £8,000 a year into your pension. The government will top up your pot by a further £2,000. If you claim the extra tax relief via a self-assessment tax return, you will receive another £2,000 – meaning you’re £4,000 better off than if you had saved or invested the funds outside of a pension.

If you’re a higher- or additional-rate taxpayer who hasn’t been claiming your full tax relief entitlement, you may be able to backdate your tax relief claim by up to four tax years.

Get in touch

If you’re worried about rising tax bills, get in touch to find out how we can support you.

• Marnel Stafford: email Marnel.Stafford@fosterdenovo.com or call 07305 970959
• Ryan Edwards: email Ryan.Edwards@fosterdenovo.com or call 07591 758136.

Alternatively, you can call our office on 0207 469 2800.

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 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.

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.