Getting to grips with your finances in 2026

Charles Dickens once famously wrote:

“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result: happiness. 

Annual income twenty pounds, annual expenditure twenty pounds ought and six, result: misery.”

This highlights an enduring truth: financial stress is often a spending problem before it becomes an income problem.

 The first step to improving your financial situation is to see the whole picture. If you often find yourself at the end of the month wondering where your money went, the solution is straightforward, though not glamorous: meticulously review your finances, then track your spending going forward.

Secondly, it’s essential to avoid overpaying for products and services. Even if you’re already tracking your expenses (which most people aren’t), many of us still end up paying more than necessary without realizing it. We inadvertently support companies that excel in separating us from our money.

Here are some practical steps you can take to combat this issue:

Check for leaks in your finances through subscriptions: The average adult in the UK spends nearly £700 a year on subscriptions, with forgotten subscriptions costing consumers £688 million in 2024 alone.

Get money back on your spending: Utilise cashback plugins and apps that allow you to earn credit on purchases to offset expenses such as your mobile phone bill. You can potentially save hundreds of pounds each year by doing this.

Consider using a cashback credit card: This strategy works best if you pay off the balance in full and on time, and if you can resist the temptation to overspend (proceed with caution).

Be mindful of your spending on Amazon: The platform often promotes higher-priced items, so it's wise to use a price-tracking plugin and set alerts for price drops. The “subscribe and save” option can also save you money, even if you cancel immediately afterwards.

Additionally, other stores may offer better prices, so try not to rely solely on Amazon for your purchases.

Set price alerts to avoid impulse buying: Deal-tracking apps can monitor products or keywords and notify you when a genuine discount is available across retailers.

Delay your online purchases: Leave items in your shopping cart for a few days; you’re likely to receive a discount code. The same tactic can work with subscriptions; start the cancellation process, and you may often be offered a lower price.

The best part is that implementing these strategies doesn’t require you to cut back on the things you enjoy; it simply involves adding a few extra steps to pay less for the same items (if you still want them).

Ensure HMRC isn't holding onto your pension funds.

When it comes to avoiding being ripped off, consider this: there is £1.3 billion that should be in people's pensions but is currently sitting with the taxman. This amount represents the pension tax relief that went unclaimed from 2016 to 2021 alone.

If you're a higher or additional-rate taxpayer with a defined contribution pension that uses relief at source, this information is particularly relevant for you. This type of pension arrangement is common in the private sector, with well-known workplace providers like Nest and Aviva using relief at source by default.

Tax relief is a government incentive that returns the income tax you've paid into your pension, effectively providing you with a top-up. However, the important thing to note is that in relief at source schemes, only the basic-rate (20%) tax relief is added automatically.

If you pay higher or additional-rate tax, you need to claim the extra relief you are entitled to, usually through a Self-Assessment tax return. Unfortunately, about 2.3 million people who should be claiming this relief are not doing so.

Fortunately, you are reading this just in time because the deadline for filing your Self-Assessment is January 31st. While you’re at it, if you’ve been contributing to your pension without claiming tax relief, you can also claim for the previous four tax years.

To ensure you don’t miss out, set a calendar reminder to do this every tax year. Additionally, feel free to forward this information to anyone who might be missing out—half of all pension savers are unaware that tax relief even exists.

Consider your career as your most valuable asset.

Effective budgeting and making the most of your resources, as Dickens suggested, is important. However, the most significant factor influencing your financial progress over time is your earning potential, which is largely within your control.

Even small changes in your salary can lead to substantial differences in your total income. For instance, a 40-year-old earning £40,000 who receives a £10,000 pay rise could potentially earn an additional £201,600 in take-home pay over the remainder of their working life. This amount is roughly equivalent to the value of a house in many areas of the UK. This figure does not even take into account the effects of compounding, the advantages for younger earners, or the possibility of much larger pay increases.

For some individuals, enhancing their earning potential may require obtaining a new qualification or acquiring practical skills. For others, it might involve negotiating a salary increase or completely changing jobs.

 

Retain a larger portion of your earnings

 

If you're fortunate enough to receive a pay rise this year, it's essential to keep an eye on how much of that increase you'll actually take home.

Currently, the income tax rates are approaching record highs. This is largely due to tax thresholds being frozen since 2021, a situation that will continue until at least 2030.

This phenomenon, known in economic terms as fiscal drag, occurs when wages increase (often just to keep pace with inflation), but tax thresholds do not rise correspondingly. As a result, more of your income is pushed into higher tax brackets, even if your actual spending power remains unchanged. Since 2021, nearly four million more people are paying higher-rate tax, and over half a million are now subject to the additional rate.

For those who are high earners, the impact can be particularly severe. For every £2 you earn above £100,000, you lose £1 of your tax-free allowance. Thus, an extra £100 in income could leave you with only £40 after tax, leading to an effective tax rate of 60%.

However, there are a few strategies you can employ to mitigate this impact:

- Increase your pension contributions: Contributing more to your pension can reduce your net adjusted income, which may help keep you out of higher tax brackets and potentially restore your lost personal allowance.

- Utilise salary sacrifice options, if available: This agreement between you and your employer allows you to exchange part of your salary for equal pension contributions or other benefits. This effectively lowers your taxable salary, so you avoid income tax on that portion, and both you and your employer save on National Insurance contributions.

- Maximise your ISA allowance: While this won’t directly reduce your tax bill, it is an effective long-term strategy, as money within an ISA can grow tax-free. Shockingly, our analysis revealed that fewer than half of the UK's highest earners make full use of their annual £20,000 ISA allowance.

It’s also important to note that starting in April 2029, only the first £2,000 of salary sacrificed will be exempt from employer National Insurance. This change may make additional contributions less advantageous for employers, so it’s wise to take advantage of current opportunities while you can.

Prepare for a difficult year, even if it turns out to be a good one.

Bad years are the times when financial plans are truly tested. How well yours holds up depends on your understanding of and experience with risk.

The problem with “risk” is that it’s a term that appears frequently in personal finance, yet it has different meanings for everyone. Ask five people about it, and you’ll likely receive five distinct opinions, much like asking what qualifies as “spicy.”

In investing, some people perceive the greatest risk as missing out—keeping too much money in cash or bonds while markets rise. For others, the biggest concern is the potential for loss—investing hard-earned money and facing the possibility that its value could decrease.

Your risk tolerance—the amount of uncertainty you are comfortable with—should ideally align with your risk capacity, which refers to your actual ability to absorb losses without negatively impacting your life. Regularly understanding and reviewing both factors as your circumstances change is essential to avoid making overly optimistic plans during good times and panicked decisions during bad times.

“You don’t design your portfolio with normal markets in mind; you design your portfolio with the worst one or two percent of scenarios in mind.”

This cautious approach can help prevent selling at the market's lowest point, attempting to time the recovery, and disrupting the compounding process that is crucial for long-term growth.

This line of thinking applies to many aspects of life: how large a mortgage you’re comfortable taking on, the size of your emergency fund, and the amount of consumer debt you're willing to manage.

A useful exercise is to think forward. If the worst-case scenario happens this year—such as a market crash or a drop in your income—how would you respond? What would be the knock-on effects, and what safety nets do you have in place?

A healthy dose of introspection, along with a bit of caution, can go a long way.

So, there you have it. Even if you only implement one or two of these suggestions, you’ll find yourself in a significantly better position by this time next year.