Imagine your financial situation is a boat gently drifting downstream. Most of the time, the water is calm. But every now and then, the current shifts, and suddenly you’re navigating through unfamiliar waters. The 2025/26 tax year changes are precisely this kind of shift, presenting UK taxpayers with new challenges and opportunities. Understanding these updates is vital. Not just to stay compliant, but to proactively steer your finances towards smoother waters.
Income Tax, Stealth Taxes through Frozen Thresholds
In 2025/26, income tax bands and allowances remain frozen at their previous levels:
- Personal Allowance remains at £12,570.
- Basic rate threshold stays at £37,700, with a higher rate kicking in from £50,270.
- The top rate of 45% continues from £125,140 upwards.
While rates remain unchanged, 20% basic, 40% higher, and 45% additional, frozen thresholds create a silent tax increase. Known as “fiscal drag” this subtle shift pulls more taxpayers into higher brackets as incomes naturally rise with inflation or wage growth.
| Threshold | 2024/25 | 2025/26 | Change |
|---|---|---|---|
| Personal Allowance | £12,570 | £12,570 | £0 |
| Basic Rate Band | Up to £37,700 | Up to £37,700 | £0 |
| Higher Rate Threshold | £50,270 | £50,270 | £0 |
| Additional Rate | Over £125,140 | Over £125,140 | £0 |
Practical Tips:
- Consider salary sacrifice options (pensions, childcare, cycle-to-work schemes) to keep taxable income below thresholds.
- Plan income distribution carefully around key tax thresholds (£50,270 and £100,000) to retain full allowances.
Scottish Income Tax, A Unique Approach
Scotland sets its own income tax rates and bands, which remain distinct from the rest of the UK. In 2025/26:
| Scottish Income Tax Bands | Rate (2025/26) |
| Starter Rate | 19% |
| Basic Rate | 20% |
| Intermediate Rate | 21% |
| Higher Rate | 42% |
| Additional Rate | 48% |
- Rates range from 19% up to a top rate of 48%.
- Thresholds for higher and additional rates are similarly frozen, mirroring the fiscal drag effect elsewhere in the UK.
Scottish taxpayers must be mindful of these differences, particularly if earning income in multiple UK regions or relocating.
Practical Tips for Scottish Taxpayers:
- Regularly review tax planning strategies with consideration to Scottish-specific rates and thresholds.
- Consider pension contributions or charitable donations to mitigate exposure to higher Scottish income tax rates.
National Insurance Contributions, Rising Costs for Employers
Employers face significant increases in their NIC costs:
| Employer NIC Details | 2024/25 | 2025/26 | Change |
| Employer NIC Rate | 13.8% | 15% | +1.2% |
| Employer NIC Threshold (Annual) | £9,100 | £5,000 | -£4,100 |
| Employment Allowance | £5,000 | £10,500 | +£5,500 |
- The employer NIC rate rises from 13.8% to 15%.
- Employers must now pay NIC on earnings over £5,000 (down from £9,100 previously).
This considerable jump means businesses may rethink hiring decisions or salary structures. However, for employees, the primary NIC thresholds remain stable at £12,570 annually, with rates unchanged at 8% and 2%.
Practical Tips:
- Businesses should review their payroll and staffing strategies carefully.
- Salary sacrifice schemes become even more attractive as both employers and employees can reduce NIC liability.
Capital Gains Tax
The capital gains tax-free allowance stays reduced at just £3,000, significantly lower than the previous thresholds of £6,000 and £12,300 in 2023/24 and 2022/23 respectively. Furthermore, basic-rate taxpayers now face an 18% CGT rate (up from 10%), and higher-rate taxpayers pay 24% (previously 20%).
| CGT Details | 06/04/2024 – 29/10/2024 | 30/10/2024 – 05/04/2025 | 2025/26 |
| Annual Exemption | £3,000 | £3,000 | £3,000 |
| Basic Rate Taxpayer | 10% | 18% | 18% |
| Higher Rate Taxpayer | 20% | 24% | 24% |
This substantial shift reduces returns for investors, property owners, and business sellers, demanding more strategic tax planning.
Practical Tips:
- Maximise use of ISAs and pensions where gains remain tax-free.
- Spread asset sales over multiple years to make full use of annual allowances.
- Consider ‘bed-and-ISA’ strategies to shelter gains.
Dividend Tax, Less Generous, More Taxable
The dividend allowance stays at £500, a sharp drop from recent years. Any dividends beyond this small allowance incur tax at rates between 8.75% and 39.35%. For business owners and investors, this reduction means careful planning is essential.
| Dividend Allowance | 2024/25 | 2025/26 | Change |
| Annual Allowance | £500 | £500 | £0 |
| Basic Rate Tax | 8.75% | 8.75% | £0 |
| Higher Rate Tax | 33.75% | 33.75% | £0 |
| Additional Rate Tax | 39.35% | 39.35% | £0 |
Practical Tips:
- Prioritise ISA investments for dividend-generating stocks.
- Evaluate remuneration strategies, balancing salary versus dividends carefully.
- Use pension contributions strategically to extract profits tax-efficiently.
Pension Allowances, More Room to Grow
The Lifetime Allowance on pensions was abolished, offering greater flexibility. While this allows unlimited pension growth without additional charges, the tax-free lump sum remains capped at £268,275.
Annual pension allowances remain generous at £60,000 per year, with a minimum tapered allowance of £10,000 for high earners.
| Pension Allowance | 2024/25 | 2025/26 | Change |
| Lifetime Allowance | Abolished | Abolished | – |
| Annual Allowance | £60,000 | £60,000 | £0 |
| Tax-free Lump Sum Limit | £268,275 | £268,275 | £0 |
Practical Tips:
- Maximise contributions while favourable conditions exist.
- Consider pension savings alongside ISA investments for tax-efficient retirement planning.
Inheritance Tax, Frozen Thresholds Trigger More Liability
Inheritance tax thresholds remain frozen at £325,000 nill rate band (NRB) and £175,000 (Residence NRB), unchanged from previous years. Due to inflation and rising asset values, more estates are becoming taxable, making proactive estate planning essential.
| Inheritance Tax Details | Threshold (2025/26) |
| Standard Nil-Rate Band (NRB) | £325,000 |
| Residence NRB | £175,000 |
| IHT Rate above Threshold | 40% |
Effective Strategies:
- Regularly utilise annual gifting allowances (£3,000).
- Explore trusts, life insurance, and charitable giving.
- Review your Will to maximise available reliefs and exemptions.
Turning Change into Opportunity
April 2025’s tax changes bring significant implications, but also opportunities. Understanding these updates is essential for maintaining financial health. Proactive planning, informed decision-making, and strategic advice can ensure you navigate these shifts effectively.
Need guidance navigating these tax changes? Contact Wainwrights Accountants today, we’re here to help you turn tax challenges into opportunities.
