Income tax planning

Tax thresholds

Income tax rates and thresholds (except in Scotland – please see below) are set to remain unchanged for 2025/26. The Personal Allowance (PA), below which income is not taxed, is £12,570. The higher rate threshold at which 40% tax kicks in is £50,270 and top rate tax (45%) begins when income exceeds £125,140.

Scotland has different tax rates and bands for non-savings and non-dividend income (e.g. employment income, business profits, rental income and pension income). In the last Scottish Budget, the following were announced for 2025/26:

• The 19% starter, 20% basic, 21% intermediate, 42% higher, 45% advanced and 48% top rates will be unchanged.

• The basic rate and intermediate rate thresholds will be increased to £15,397 and £27,491 respectively (from £14,876 and £26,561).

• The higher rate, advanced rate and top rate thresholds will be frozen at £43,662, £75,000 and £125,140 respectively.

Many Scottish taxpayers now pay a significantly higher amount of tax than those elsewhere in the UK, although some lower earners pay slightly less than in the rest of the UK.

Personal allowance (PA)

The Personal Allowance (PA) of £12,570 is progressively withdrawn for individuals with income of more than £100,000 leading to a marginal rate of 60% on income between £100,000 and £125,140. The marginal rate is different in Scotland and for those who have dividend income within this band.

Planning points 

• Consider taking action to reduce your taxable income particularly where your income falls just above one of the thresholds. There are various options to achieve this including making pension contributions and Gift Aid donations.

• Income that can easily be moved from year to year includes:
  • a bonus from your own company
  • dividends from your company
  • encashments of life assurance bonds
  • withdrawal of taxable income from pension schemes in ‘drawdown’.

• Income can also be moved between spouses or civil partners in order to make sure that PAs and lower rate tax bands are utilised. This is not always easy to do, but the following methods are permissible:
  • make an outright gift of investments that produce taxable income
  • put savings and investments into joint names and share the income
  • employ the spouse or partner in the other person’s business
  • take the spouse or partner into partnership in that business

• HMRC can challenge some of these methods if they think the transfer is not genuine. You should always take tax advice to be sure that your plan will work.

• If you have children, it may be possible to switch income from one spouse/civil partner to the other (as detailed above), so that both spouses/civil partners’ incomes remain below the £60,000 threshold for the High-Income Child Benefit Charge (HICBC).

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.