An Introduction to Income Tax
The Chancellor confirmed in the 2025 Autumn Budget that income tax thresholds are expected to remain frozen at current levels until April 2031.
As a result, rising earnings are likely to bring more individuals within higher rate bands or into the personal allowance taper, particularly where income approaches £100,000.
These factors, together with the announced increase in dividend rates from April 2026, act as a useful reminder to review your income tax allowances and planning considerations.
We delve into these considerations, as well as the rates and allowances available for the current year, below.
Please note that the thresholds and rates are different for Scottish taxpayers, and these can be found here.
Rates and Allowances
The tax-free personal allowance for the 2025/26 tax year remains static at £12,570, with the Government stating their intention for this allowance to remain frozen until April 2031.
The next £37,700 of income is taxed at the basic rate of 20% (8.75% for dividend income).
Higher rate tax of 40% (33.75% for dividends) is charged on income above £50,270 and additional rate tax (ART) of 45% (39.35% for dividends) is charged on income above £125,140.
Note that dividends are treated as the top slice of income, so the basic and higher rates are first allocated against other incomes.
Under current guidance, the allowances will remain at the above levels until April 2031.
The personal allowance is reduced by £1 for every £2 of income above £100,000. There is therefore no personal allowance available at all where income exceeds £125,140. Consequently, the effective rate of tax on income between £100,000 and £125,140 is 60%. This also means that the effective rate of tax relief on pension contributions and gift aid donations is 60% within this income band.
From April 2026, the basic rate of tax payable on dividends in excess of the dividend allowance will increase by 2% to 10.75%, as too will the higher rate to 35.75%. The additional rate on dividends will remain unchanged at 39.35%.
Savings and Dividends
You should consider whether sufficient income can be generated to fully utilise the personal allowance and basic rate band. This may be done by careful planning of the timing of dividends from a private company or distributions from a family trust.
The personal savings allowance entitles basic rate taxpayers to £1,000 of tax-free savings income and higher rate taxpayers £500. However, additional rate taxpayers receive no allowance.
You may also get up to £5,000 of interest and not have to pay tax on it if you qualify for the starting rate for savings. You’re not eligible for the starting rate for savings if your other income is £17,570 or more.
The dividend tax allowance of £500 is available for all taxpayers.
Amounts falling within the dividend allowance are taxed at 0%. The allowance will, however, use any part of the lower rate bands that they would otherwise have fallen into.
Interest and dividends received within ISAs will continue to be entirely tax-free. The ISA will remain at £20,000 for 2026/27, with future changes proposed to start from April 2027.
Finally, you may wish to review and advance the payment of dividends prior to 6 April 2026, after which the rate of tax on dividends will rise.
Married Couples
In certain circumstances, married couples or civil partners can sometimes transfer 10% of their personal allowance between them by making an election (applying online or by post). Tax relief is given via a tax reduction of 20% of the transferred amount of £1,260 for 2025/26, reducing tax by up to £252. This can be backdated for the previous four tax years, as well as the current tax year.
This transfer is only available if one party is a non-taxpayer and the other is a basic-rate taxpayer. To get the full benefit the non-taxpayer must have an income of £11,310 or less.
If either of you were born before 6th April 1935, you may benefit more through the Married Couple’s Allowance.
Grandparents’ Income
There is potential to divert income from grandparents or other relations (not parents), in order to utilise a minor child’s personal allowance. This can be achieved by creating a family trust as part of a wider Inheritance Tax planning exercise. Professional advice should be sought before undertaking this.
High-Income Child Benefit Charge
If you or your partner receives child benefit, it is important to remember that taxpayers with an adjusted net income in excess of £60,000 are liable to the high-income child benefit charge.
The charge will be levied on the higher earning partner and can be deducted through PAYE or through Self-Assessment. The charge is 1% of the full child benefit award for every £200 income between £60,000 and £80,000. Where income is more than £80,000, effectively all child benefits are lost.
You can elect not to receive child benefit if you or your partner prefer not to pay the charge but through the use of personal pension contributions and gift aid donations, your adjusted net income can be lowered, potentially reinstating some or all of the child benefit received.
If you or your partner receive child benefit, it is important to remember that taxpayers with an adjusted net income in excess of £60,000 are liable to the high-income child benefit charge.
James Kipping, Tax Partner at MHA
Utilising Tax Efficient Investments - Venture Capital Trusts (VCTs)
From April 2026, the upfront income tax relief available on new shares will decrease from 30% to 20%. Therefore, if you currently invest in VCTs to reduce your overall income tax liability, professional advice should be sought to determine whether VCT investment remains appropriate in light of these changes, or if you would like to consider its suitability for the first time.
VCTs will continue to pay tax-free dividends, with the Government announcing changes to what companies VCTs can invest into.
To read more on VCTs and to explore other tax-efficient investments, such as Enterprise Investment Schemes (EIS), Family Investment Companies (FICs), as well as ISAs and Offshore Bonds please visit:
Key Income Tax Considerations Before 6 April 2026
For individuals whose income level is around where the personal allowances may be tapered, particularly those with income close to, or exceeding, the £100,000 threshold, it is often appropriate to review how taxable income is structured, considering:
- how income and investments are structured
- whether ISA allowances have been fully utilised
- the timing of dividend payments ahead of rate changes
- eligibility for savings and dividend allowances
- the ownership of income-producing assets between spouses or civil partners
- pension contributions
- charitable donations qualifying for Gift Aid donations
- understanding exposure to the High-Income Child Benefit Charge
- exposure to investments with specific income tax reliefs, such as EIS or VCTs
For individuals whose income levels where personal allowances may be tapered, particularly those with income close to, or exceeding, the £100,000 threshold, it is important to review how taxable income is structured and to consider the available allowances ahead of the tax year-end.
James Kipping
Partner & Head of Private Client Tax at MHA
This content is for information purposes only and should not be relied upon as financial advice. Individual circumstances vary, and you should seek advice from a qualified Independent Financial Adviser to understand how different income sources and tax rules may apply to you.