Personal Income Tax
Tax rates and allowances – 2025/26 (Table A)
In 2023, the previous Chancellor announced that the main personal allowance and the 40% threshold will remain at their 2022/23 levels until the end of 2027/28. This has been widely criticised as a ‘stealth tax’, in that it increases the tax collected without apparently increasing rates or reducing allowances. For example, a person with a salary of £50,270 will pay £7,540 in income tax in 2024/25; if their income increases by 10% to £55,297 in any of the years to 2027/28, all of the increase will be taxed at 40%, and they will pay £9,551.
The income level above which the personal allowance is tapered away also remains £100,000; it will be reduced to zero when income is £125,140, which is also the threshold for paying 45% tax. In the tapering band, the loss of tax-free allowance creates an effective marginal rate of 60%. Once again, annual increases in income will bring more people into these higher rates.
It was suggested that the new Chancellor could exploit this possibility for raising revenue, while keeping to the letter of Labour’s manifesto promises, by extending the freeze for another two years. In the event, she declared that the inflation-linked increases to the main bands and allowances, which applied in most years before 2022/23, will resume for 2028/29 and later years. However, many more people will move into higher rates in the intervening three and a half years.
High Income Child Benefit Charge (HICBC)
The HICBC continues to apply to the higher earner of a couple where one receives Child Benefit and either of them has income of more than a set threshold. For 2024/25 the threshold is £60,000; the band of income over which the clawback is calculated is £20,000 (1% of the total benefit for every £200 of income), so that the whole benefit is lost when income reaches £80,000. The HICBC is one reason that an individual might have to register for self-assessment and file a tax return.
In March, Chancellor Jeremy Hunt announced plans to reform the HICBC from April 2026 to take into account the combined income of the household, rather than just the higher earner. This would reduce the unfairness of clawing back nothing from a couple each earning £59,000, compared to full clawback where one of the couple earns £80,000. Chancellor Rachel Reeves has decided not to proceed with this plan. The charge will therefore remain dependent on the income of the higher earner of the couple.
Scottish and Welsh rates – 2025/26 (Table A)
The Scottish government has the power to set its own income tax rates for Scottish taxpayers for non-savings, non-dividend income. Many Scottish taxpayers now pay at higher rates of income tax than those elsewhere in the UK, although some low earners pay less. The Scottish Budget, which will confirm the rates for 2025/26, will take place on 4 December 2024.
The Welsh government has similar powers for Welsh taxpayers but has not yet varied the main UK rates. The draft Welsh Budget will be published on 10 December 2024 and will be finalised by 25 February 2025.
Dividend income
The dividend allowance exempts some dividend income from tax, although that income still counts towards the higher rate thresholds. For 2025/26, the allowance is unchanged at £500. As HMRC does not routinely receive information about dividends received by taxpayers, more people may have to file tax returns to declare tax liabilities which previously would have been covered by the allowance (which was £2,000 up to 2022/23).
The tax rates on dividend income over £500 remain unchanged. The ordinary rate, paid by basic rate taxpayers, is 8.75%, the upper rate is 33.75%, and the additional rate is 39.35%. These rates apply across the UK.
The 33.75% rate also applies to tax payable by close companies (broadly, those under the control of five or fewer shareholders) on ‘loans to participators’ that are not repaid to the company within 9 months of the end of the accounting period.
Recent reductions in the dividend allowance and increases in the tax rates on dividends and capital gains add to the relative attractiveness of holding shares in a tax-free ISA or in a Venture Capital Trust (VCT). Dividends arising in an ISA or a qualifying VCT are not taxed and do not count towards the allowance.
Savings income
The savings allowance remains £1,000 for basic rate taxpayers, £500 for 40% taxpayers and nil for 45% taxpayers. People with savings income above these limits may have to declare it in order to pay tax.
The savings rate band remains at £5,000. Non-savings income is treated as the ‘first slice’ of income, using the tax-free allowance and the savings rate band; if any of the £5,000 band is not used by this ‘slice’, any savings income falling within that band is taxed at 0%.