Millions missing out on tax relief as frozen thresholds push more into higher tax bands, according to Moneyfarm

Moneyfarm today issued new guidance to help UK taxpayers navigate the growing impact of frozen tax thresholds, particularly the higher rate (40%) and additional rate (45%) bands, and ensure they do not miss out on reclaiming tax relief they are entitled to. Findings from a recent freedom of information request show that  5.6 million Brits paid too much tax last year, totalling a worrying £3.5 billion owed across the country.

For the 2025/26 tax year, the Government has kept Income Tax thresholds frozen, meaning more people are being pulled into higher tax brackets as their earnings rise. Current thresholds show higher rate tax (40%) begins at £50,270 and additional rate tax (45%) applies above £125,140.

Meanwhile, individuals earning over £100,000 face a particularly steep cliff edge. At this level, the Personal Allowance of £12,570 is withdrawn at a rate of £1 for every £2 earned above £100,000,creating an effective marginal tax rate of 60% until income reaches £125,140. Parents also lose valuable childcare funding once one parent earns over £100,000.

With more earners than ever now falling into this bracket due to “fiscal drag”, Moneyfarm is encouraging clients to review their financial planning to avoid unnecessary tax leakage.

The Growing Impact of Frozen Thresholds

The Government’s long-term freeze of both the personal allowance and key tax thresholds has significantly increased the number of higher rate taxpayers. The £50,270 higher rate threshold and the £125,140 additional rate threshold remain unchanged until at least 2028.  As salaries rise with inflation, more individuals are automatically pushed into higher tax bands, despite not necessarily feeling any wealthier in real terms. This phenomenon, known as fiscal drag, is estimated to affect millions of UK workers. 

Carina Chambers, Pensions Technical Expert at Moneyfarm comments: “Many higher earners are failing to reclaim the additional tax relief they are due, particularly on pension contributions and charitable donations. With more people now pulled into higher and additional rate bands, the self-assessment process has become essential, not only to stay compliant, but to ensure you’re not leaving significant sums you’re entitled to unclaimed. It is more important than ever for savers to understand their tax position and take practical steps to protect more of their income.”

To help individuals navigate this evolving landscape, Moneyfarm outlines three key steps to ensure they are managing their tax contributions effectively: 

1. Pension Contribution Tax Relief

UK taxpayers receive automatic 20% tax relief at source on pension contributions. Higher rate (40%) and additional rate (45%) taxpayers must actively reclaim the remaining relief by completing a self-assessment tax return. For example, higher rate earners can claim an additional 20%, whileadditional rate earners can claim an additional 25%. If your tax return isn’t completed, this money can go unclaimed, which is a huge missed opportunity.

2. Gift Aid Reclaims

Similarly, Gift Aid allows charities to reclaim basic rate relief, but the individual is still entitled to the higher rate portion which needs to be reclaimed via your self-assessment.

3. Avoiding the £100,000 Tax Trap

Holding income below the £100,000 threshold, where feasible, can be achieved through pension contributions, salary sacrifice, or spreading income across tax years. These strategies help preserve the Personal Allowance and avoid the 60% effective rate. 

Carina adds: “We’re seeing an unprecedented number of clients who have unexpectedly crossed into higher tax bands and don’t realise they now have a legal obligation to file self-assessment, or that they’re missing out on substantial tax refunds. The frozen thresholds mean this isn’t just affecting traditional high earners anymore. Teachers, nurses, and middle managers are finding themselves in 40% or even 60% tax brackets. Without completing a self-assessment return, these individuals are effectively donating hundreds or thousands of pounds to HMRC that they could legally keep. We’re urging anyone earning above £50,000 to review their position immediately and seek professional guidance to ensure they’re not leaving money on the table.”