Income Tax Planning for 2025/26
Income Tax Rates & Thresholds
For the 2025/26 tax year, the income tax rates and thresholds (except in Scotland) will remain unchanged:
- Personal Allowance (PA): £12,570 (income below this is not taxed).
- Higher Rate Threshold (40% tax): £50,270.
- Top Rate Tax (45% tax): Applies to income exceeding £125,140.
Scottish Income Tax Rates & Bands
Scotland applies different tax rates for non-savings, non-dividend income (e.g., employment income, rental income, pensions, and business profits). The 2025/26 Scottish Budget announced:
- Tax rates remain unchanged at 19% (starter), 20% (basic), 21% (intermediate), 42% (higher), 45% (advanced), and 48% (top rate).
- Basic rate and intermediate rate thresholds will rise:
- Basic rate: £15,397 (up from £14,876).
- Intermediate rate: £27,491 (up from £26,561).
- Higher rate, advanced rate, and top rate thresholds remain frozen at £43,662, £75,000, and £125,140, respectively.
Scottish taxpayers generally pay higher taxes than the rest of the UK, except for some lower earners who benefit from lower starter rates.
Personal Allowance Reduction
- The £12,570 Personal Allowance (PA) is gradually withdrawn for those earning over £100,000, leading to an effective marginal tax rate of 60% on income between £100,000 and £125,140.
- In Scotland and for those receiving dividend income, the effective tax rate may differ.
Tax Planning Strategies
To reduce your taxable income and manage your tax liability, consider the following strategies:
1. Reducing Taxable Income
- If your income just exceeds a tax threshold, consider reducing taxable income through:
- Pension contributions (tax-efficient and reduce taxable income).
- Gift Aid donations (charitable giving extends your basic rate tax band and reduces taxable income).
2. Deferring Income
Some forms of income can be deferred to a future tax year:
- Bonuses (for business owners or directors).
- Dividends from a personal company.
- Encashment of life assurance bonds.
- Withdrawals from pension schemes in drawdown.
3. Transferring Income Between Spouses
To fully utilise both spouses’ Personal Allowances and tax bands, income can be shifted through:
- Gifting investments that generate taxable income.
- Putting savings and investments into joint names and splitting the income.
- Employing a spouse/partner in your business.
- Bringing a spouse/partner into a partnership to share business income.
⚠️ Important: HMRC may challenge these arrangements if they believe they are not genuine. Seek tax advice to ensure compliance.
4. High-Income Child Benefit Charge (HICBC)
- If you or your spouse earn over £60,000, you may be subject to the HICBC, reducing or eliminating Child Benefit.
- By shifting income between spouses, both can remain below the £60,000 threshold and retain more of their Child Benefit.
Next Steps
📌 Plan Early – The start of the 2025/26 tax year is a great time to reassess your tax position.
📌 Seek Professional Advice – If considering income shifting, pension contributions, or deferral strategies, ensure they are correctly structured to comply with HMRC rules.
