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The Ultimate Guide to the 2025/26 UK Tax Year: Spend Less, Save More

Financial planning is about making the most of every opportunity to save, invest and protect your wealth. The 2025/26 tax year is no exception, and understanding how to navigate allowances, thresholds, and strategies is key to keeping more of your hard-earned money. This guide will help you manage your money around taxes. 

3 key reasons why tax planning matters so much

Let’s get to the heart of what tax planning is? Planning your finances around tax is all about minimising your tax liability, while staying compliant with tax legislation. By understanding the allowances and thresholds available to you, you can optimise your finances and keep more of your wealth.

1. Maximises Tax Allowances: Many tax-free allowances are “use it or lose it.” Failing to act means losing these benefits forever.

2. Reduces Tax Liabilities: Proper planning can reduce income tax, capital gains tax, and inheritance tax.

3. Avoiding Penalties: Staying compliant with ever-changing tax rules prevents costly fines and charges.

In this guide we will explore different types of tax and what the changes are for the 2025/26 tax year.

Tax on earnings & personal allowances

We start off with some facts and figures around personal tax allowances before we move on to understanding how to make the most of tax efficient saving with investments and pensions. Then understand how business owners can plan effectively around tax.

The Personal Allowance: £12,570

Definition: The Personal Allowance is the amount of income you earn before paying tax, currently set at £12,570 for up to and including 2025/26. This is for the UK, including Scotland. For those earning over £100,000, the allowance reduces by £1 for every £2 above this limit, disappearing entirely at £125,140. Effectively, what this means is that, for every £100 you earn, between £100,000 and £125,140, is reduced to £40, as you lose an additional £20 via the reduced allowance.

2025/26 Income Tax Rates (Non-dividend, non-savings income)

  • Basic Rate: Applied at 20% to taxable income up to £37,700.
  • Higher Rate: Taxed at 40% on the next slide of income over £37,700.
  • Additional Rate: Charged at 45% on income above £125,140.

Scottish Taxpayers (Non-dividend, non-savings income)

  • Starter Rate: 19% between £12,571 to £15,397
  • Basic Rate: 20% between £15,398 to £27,491
  • Intermediate Rate: 21% between  £27,492 to £43,662
  • Higher Rate: 42% between £43,663 to £75,000
  • Advanced Rate: 45% between £75,001 to £125,140
  • Top Rate: 48% over £125,140

TOP TIP: If you are in the additional or advanced tax bracket, consider reducing your tax below the thresholds. You could redirect income to a pension or use Gift aid to reduce taxable earnings and reinstate your Personal Allowance.

Personal Savings Allowance

The Personal Savings Allowance (PSA) is a tax-free allowance that lets you earn interest on your savings without paying tax. The amount you can earn depends on your income tax band:

  • Basic rate: Earn up to £1,000 in interest per year tax-free
  • Higher rate: Earn up to £500 in interest per year tax-free
  • Additional rate: You don’t get a Personal Savings Allowance

Capital Gains Tax (CGT)

The CGT annual exemption on individuals and estates is £3,000. This allows you to realise gains up to this amount without incurring tax. As of 30th October 2024 the gains above the exemption have increased. These are the CGT rates for 2025/26:

  • 18% below the UK higher rate band
  • 24% within UK higher and additional rate bands
  • Business Asset Disposal Relief has increased from 10% to 14% on a lifetime limit of £1,000,000 for trading businesses and companies.

How to use your annual allowance: Realise gains each year up to the allowance. You can transfer assets between spouses to utilise both allowances. You can also utilise the Bed and ISA strategy, where you sell investments to realise gains, then reinvest in an ISA for tax-free growth.

Inheritance Tax (IHT)

  • Nil Rate Band: A threshold of £325,000 where no inheritance tax is due on an estate.
  • Residence Nil Rate Band: An additional £175,000 allowance for passing on a main residence to direct descendants.
  • Inheritance Tax Strategies:
    • Use the annual gift allowance of £3,000 to reduce your estate’s value. That is £3,000 per donor and £250 per donee.
    • Gifts to charity reduce IHT liability, and donating 10% or more of an estate can lower the rate to 36%.
    • Consider life insurance to manage IHT liabilities.

Other Key Allowances

  • Marriage Allowance: Allows eligible couples to transfer up to £1,260 of unused Personal Allowance to a spouse or civil partner. More on this later.
  • Rent-a-Room Relief: Permits individuals to earn up to £7,500 tax-free from letting a furnished room in their home.
  • Blind Person’s Allowance: £3,130
  • Property allowance and trading allowance: £1,000 each

Don’t forget tax treatment varies according to individual circumstances and is subject to change. Succession Planning, Inheritance Tax Planning & Estate Planning are not regulated by the Financial Conduct Authority

ISA Allowance: Maximising tax-free savings and investments

One of the most tax-efficient ways to save and invest is through ISAs (Individual Savings Accounts). Each individual can invest up to £20,000 annually across different types of ISAs, with no tax on the income, dividends, or growth in that ISA. By utilising your ISA allowance each tax year, you can build wealth free from tax. Here are the different types of ISAs you can get:

Cash ISAs: These are savings accounts where interest is earned tax-free. They are ideal for individuals seeking little to no risk. Cash ISAs can act as a safe haven for your emergency fund or short-term savings. Just make sure you understand the restrictions for withdrawals on cash ISAs. If you have spare cash at the end of a tax year and spare ISA allowance, putting your money in to a cash ISA is an option to make the most of your tax allowances at the end of a tax year.

Stocks and Shares ISAs: Investments in stocks, bonds, funds, or other assets grow free of capital gains tax (CGT) and dividend tax. Investing in a Stocks and Shares ISA early in the tax year allows you to maximise the benefits of compound growth. People who have built up a sizeable cash ISA often choose to leave some cash in there for an emergency and then port over surplus cash to a Stocks and Shares ISA, providing the product provider will allow you to do a partial transfer.

Lifetime ISAs (LISAs): Designed for saving towards a first home or retirement. You can contribute up to £4,000 annually, and the government adds a 25% bonus, up to £1,000 per year. Funds can only be used to buy a first home (up to £450,000) or accessed tax-free after age 60. Early withdrawals for other purposes incur a 25% penalty. When it comes to Lifetime ISAs, not many people also know that you will incur a lifetime ISA government withdrawal charge (currently 25%) if you transfer the funds to a different ISA or withdraw the funds before age 60 and you may therefore get back less than you paid into a lifetime ISA. On top of that by saving in a lifetime ISA instead of enrolling in, or contributing to an auto-enrolment pension scheme, occupational pension scheme, or personal pension scheme you may lose the benefit of contributions from your employer (if any) to that scheme, and your current and future entitlement to means tested benefits (if any) may be affected.

Junior ISAs (JISAs): Parents and grandparents can contribute up to £9,000 annually per child into a Junior ISA. Funds grow tax-free and can be accessed by the child at age 18. Regularly contributing to a JISA can provide a substantial tax-free nest egg for education, property, or future expenses.

TOP TIP: If you are in a relationship you can double your tax-free savings by each contributing the full £20,000 allowance, achieving a combined total of £40,000 annually.

There are a lot of options which are bespoke to you and your personal situation. It is all about making the most of the money you have. This is one of the reasons why people choose to work with a financial adviser.

KEY THINGS TO REMEMBER: ISA Investors do not pay any personal tax on income or gains but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA manager . Tax treatment varies according to individual circumstances and is subject to change. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.

2025/26 tax strategies for business owners

Running a business comes with unique tax opportunities and challenges. Business owners can significantly reduce their personal and corporate tax liabilities by leveraging allowances, deductions, and strategic financial planning. Business owners have several ways to extract profits from their company tax-efficiently:

  1. Dividends: Dividends are taxed at lower rates than salary, making them an efficient way to distribute profits. Each individual gets a £500 dividend allowance for 2025/26, and rates are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, 39.35% for additional rate taxpayers. When it comes to trusts the income exemption is £500 and the rate applicable to trusts is 39.35% for dividends and 45% for other income.
  2. Salary and Personal Allowance: Paying yourself a salary up to the Personal Allowance (£12,570) keeps income tax-free and allows for National Insurance credits toward state pension.
  3. Pension Contributions: Employer pension contributions are exempt from income tax, National Insurance, and corporation tax, making them one of the most tax-efficient ways to extract profits. A pension contribution can reduce the company’s taxable profits while building wealth.
  4. Maximise allowable business expenses: Deducting legitimate business expenses reduces taxable profits, which in turn lowers your corporation tax bill. Key expenses include staff wages, bonuses, and pensions, office rent, utilities, and supplies, business travel and mileage, marketing, training, and professional development. Ensure proper records are kept to justify all expenses and time capital purchases strategically to maximise tax relief.
  5. Take advantage of capital allowances: These allow businesses to deduct the cost of qualifying investments in plant, machinery, and equipment from taxable profits. With the Annual Investment Allowance you can claim 100% tax relief on investments up to £1 million annually. There is also Super Deduction, where until March 2026, you can claim 130% of qualifying capital expenditure for plant and machinery.
  6. R&D Tax Credits: If your business engages in research and development, you can claim tax credits for eligible R&D costs. SMEs can claim up to 230% of qualifying expenditure, reducing corporation tax liabilities.
  7. VAT planning: VAT is a cost for businesses and proper planning can help optimise cash flow and reduce liabilities. The Flat Rate Scheme simplifies VAT calculations for businesses with turnover under £150,000. The Cash Accounting Scheme means you pay VAT only when you receive payment from customers rather than when you issue invoices.
  8. National Insurance planning: For business owners employing staff, National Insurance Contributions (NICs) can be a substantial cost. Strategies to manage this include reducing employee salaries in exchange for non-cash benefits like pension contributions and utilising the levy to fund staff training and development.
  9. Tax-efficient exit planning: If you are considering selling your business or retiring you can minimise the tax impact. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) reduces capital gains tax to 10% on the first £1 million of lifetime gains when selling a business. You can transfer business assets to family members using reliefs like Business Property Relief (BPR), which can reduce IHT to 0%. Or you can do a pre-sale restructuring to make it more attractive to buyers and optimise tax efficiency.

Running a successful business requires balancing growth, cash flow, and tax efficiency. Tax treatment varies according to individual circumstances and is subject to change. Partnering with a financial adviser ensures you stay compliant, maximise opportunities, and keep more of your hard-earned profits. Succession Planning, Inheritance Tax Planning & Estate Planning are not regulated by the Financial Conduct Authority

Venture Capital Trusts, EIS, and SEIS

For investors looking to maximise tax efficiency while supporting UK businesses, several government-backed schemes offer significant tax relief.

Venture Capital Trusts (VCTs): Investments in VCTs offer 30% income tax relief on amounts up to £200,000 per tax year. VCTs are designed to encourage investment in smaller, high-growth companies and provide additional benefits like tax-free dividends and income tax rebates.
Enterprise Investment Scheme (EIS): An EIS allows for 30% income tax relief on investments up to £2,000,000 annually, with amounts above £1,000,000 requiring investment in knowledge-intensive companies. Additional benefits include Capital Gains Tax Deferral Relief and inheritance tax exemption after two years if shares are held at death.
Seed Enterprise Investment Scheme (SEIS): SEIS is targeted at early-stage companies and offers 50% income tax relief on investments up to £200,000 annually. Additional benefits include CGT Reinvestment Relief and exemption from CGT on profits if shares are held for at least three years.

Key Considerations:

1. These schemes carry higher risk, as they target small, early-stage companies.

2. Investors must hold shares for the minimum required period (three to five years) to retain tax relief.

3. Diversification is crucial to manage risk effectively.

4. Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS), Venture Capital Trusts (VCT) & Business Property Relief Schemes (BPR) invest in assets that are high risk and can be difficult to sell.

Tax Planning for Pensions

For 2025/26, the basic State Pension and new State Pension will increase by 4.1% in line with earnings growth. The New state pension is £11,973 per annum. The individual basic State Pension is £9,167.40 per annum and the married/civil partner rate, on one spouse’s contribution rises to £14,671.80 per annum. When it comes to allowances not much has changed.

  • The Annual Allowance: £60,000. Contributions exceeding this amount may be subject to tax, and tapering applies for incomes above £260,000.
  • Lump sum and death benefit allowance: £1,073,100. If an individual’s pension fund exceeds £1,073,100, and they withdraw lump sums or pass it on as a death benefit, amounts above this may lose their tax-advantaged status. This figure reflects the maximum amount of tax-free benefits an individual can receive from a registered pension scheme without incurring additional tax charges.
  • Lifetime Allowance (LTA) has been abolished from April 2024, however this limit still applies in specific scenarios.
    • Death Benefits: If a pension is paid out as a lump sum upon death before age 75, amounts above £1,073,100 may be subject to income tax at the recipient’s marginal rate.
    • Tax-Free Cash Limit: This is effectively a guide to the upper limit on tax-efficient pension withdrawals or lump sums.
  • Money Purchase Annual Allowance: £10,000. The MPAA is a restricted annual allowance that applies once an individual starts to access their pension flexibly. For example this might be taking income through drawdown or a lump sum beyond the tax-free portion.

Under normal circumstances, individuals can contribute up to £60,000 annually to pensions with tax relief. However, once the MPAA is triggered, the contribution limit reduces to £10,000 per year, and contributions above this limit are subject to tax charges. The MPAA ensures individuals don’t abuse pension flexibilities to recycle tax-free cash back into pensions for further tax relief.

Money Purchase Annual Allowance planning considerations:

  1. Avoid triggering the MPAA unnecessarily: If you don’t need immediate access to your pension, consider leaving it untouched or using alternative strategies, such as ISAs, to avoid restricting your future contributions.
  2. Understand the death benefit implications: For estates with pensions exceeding £1,073,100, tax planning is essential to manage potential liabilities on death. For example, drawing down funds before death (if above 75) may reduce the taxable portion passed to beneficiaries.
  3. Maximise tax-free lump sums strategically: If you’re nearing retirement, careful planning around the £268,275 limit can ensure you maximise tax efficiency.

Utilising family tax allowances to become more tax efficient in 2024/25

Family allowances provide families with opportunities to reduce their overall tax liability. This can include deductions for dependent children, education-related expenses, and other family-specific tax benefits. The marriage allowance, for example, is a transferable allowance that enables married couples to transfer part of their personal allowance to one another, as long as the recipient is not liable to pay higher or additional tax rates. The marriage/civil partner’s transferrable allowance for 2025/26 is unchanged (£1,260).

The High Income Child Benefit Charge (HICBC) is a tax charge introduced  to gradually reduce the amount of child benefit received by higher-income individuals or households. Child benefit is a government payment provided to eligible parents or guardians to support the cost of raising children. If an individual or their partner earns over a certain threshold, the HICBC will apply. In the 2024 Spring Budget it was announced that this threshold was increasing from £50,000 to £60,000 from April 2024.

In addition, Jeremy Hunt also announced that the rate at which the HICBC is charged will also be halved from 1% of the Child Benefit payment for every additional £100 earnt above the threshold, to 1% for every £200. This means Child Benefit will not be withdrawn in full until individuals earn £80,000 or higher. Acknowledging concerns about the current fairness of the High Income Child Benefit Charge (HICBC), the government has noted the disparities in its application. For example, a household with two earners each making £49,000 (totalling £98,000) isn’t subject to the HICBC, whereas a single earner household exceeding £50,000 is. To address this issue, the government intends to shift the administration of the HICBC to a household basis instead of an individual one by April 2026.

2025/26 Stamp Duty and Scotland Land and Buildings Transaction Tax

In regards to stamp duty, regulations vary based on your location within the UK, England and Northern Ireland, Scotland, or Wales, or if you are a non-UK resident. If you need assistance or guidance on stamp duty matters, feel free to reach out to us.

For the UK and Ireland, Stamp Duty Land Tax for main residences

  • Property purchase price below £125,000: 0%
  • Property purchase price between £125,001 and £250,000: 2%
  • Property purchase price between £250,000 and £925,001: 5%
  • Property purchase price over £925,001 and £1,500,000: 10%
  • Property purchase price over £1,500,000: 12%
  • Non-resident purchasers: 2% surcharge on properties £40,000 or more
  • First time buyers: 0% on first £300,000 for properties up to £500,000
  • Residential properties bought by companies over £500,000: 17% of total consideration, subject to certain exemptions.

*This is for residential properties bought by companies

Scotland Land and Buildings Transaction Tax on Residential Property

  • Property purchase price below £145,000: 0%
  • Property purchase price between £145,001 and £250,000: 2%
  • Property purchase price between £250,001 and £325,000: 5%
  • Property purchase price between £325,001 and £750,000: 10%
  • Property purchase price over £750,000: 12%
  • First time buyers: 0% on the first £175,000

Wales Land Transaction Tax on Residential Property

  • Property purchase price below £225,000: 0%
  • Property purchase price between £225,001 and £400,000: 6%
  • Property purchase price between £400,001 and £750,000: 7.5%
  • Property purchase price between £750,001 and £1,500,000: 10%
  • Property purchase price over £1,500,000: 12%

2025/26 stamp duty for commercial property

Stamp Duty for Commercial Property

– Property purchase price below £150,000: 0%

– Property purchase price between £150,001 and £250,000: 2%

– Property purchase price over £250,000: 5%

You may be able to claim relief from Stamp Duty Land Tax if you’re buying land or buildings in a Freeport or Investment Zone special tax site in England. If you’re buying land or buildings in a Freeport or Investment Zone special tax site in:

– Scotland, Green Freeports Land and Buildings Transaction Tax Relief is available on qualifying transactions in designated Green Freeport tax sites.

– Wales, Senedd Cymru has approved legislation to provide Land Transaction Tax relief — this relief will be available for the Celtic Freeport on 26 November 2024 until 30 September 2029 initially.

Scotland Land and Buildings Transaction Tax on Commercial Property

– Property purchase price below £150,000: 0%

– Property purchase price between £150,001 and £250,000: 1%

– Property purchase price over £250,000: 5%

Wales Land Transaction Tax on Commercial Property

– Property purchase price below £225,000: 0%

– Property purchase price between £225,001 and £250,000: 1%

– Property purchase price between £250,001 and £1,000,000: 5%

– Property purchase price over £1,000,000: 6%

Stamp Duty for additional properties, residential and all corporate residential properties

Property purchase £40,000 or more:

– Stamp Duty Land Tax England and Northern Ireland: add 5% to rates

– Scotland Land and Buildings Transaction Tax: add 6% to rates

– Land Transaction Tax Wales: add 4% to rates

National Insurance Contributions 2025/26

Class 1 National Insurance Contributions (NIC) rates:

  • Employees NIC is 8% and Employers NIC is 15%
  • Employment allowance is £10,500 per business. It is not available for businesses that have a Director as a sole employee.
  • There is no NIC on first £242 per week (employee) and £96 per week (employer). Then the main rate is charged up to £967 per week for an employee and there is no limit for an employer. There is a 2% rate for employees on earnings above £967 per week.
  • There is nil rate of employer NIC on earnings up to £967pw for employees aged under 21, apprentices aged under 25 and ex-armed forces personnel in their first twelve months of civilian employment.

Class 2 and 3: When it comes to self-employed individuals the Class 2 of National Insurance contributions means that those earning over £6,845 are no longer obligated to make payments, this is known as the small profits threshold.  The Class 3 NIC rate is a voluntary contribution at a flat rate of £17.45 per week or £923 per annum.

Class 4: The main rate of Class 4 National Insurance Contributions (NICs) for self-employed individuals 6% on self-employed profits from £12, 570 to £50, 270. Over this there is a 2% rate.

How tax fits in with your financial planning

Whether you manage your own finances or have an adviser to manage them for you, tax-efficient planning is a crucial component of an overall financial plan. Here’s how tax planning fits into the broader framework of your financial strategy:

1. Maximising income and minimising deductions: If you or your financial adviser can identify opportunities to increase tax-efficient income, like using reliefs and tax thresholds you can reduce the impact tax has on your finances.

2. Investment Planning: Choosing tax-efficient investment strategies minimise capital gains and income taxes.

3. Estate Planning: Structuring your estate in a tax-efficient manner can minimise inheritance taxes and the right financial products can ensure you transfer wealth down to other generations tax efficiently.

4. Retirement Planning: Contributing to tax-advantaged retirement accounts to reduce current taxable income. Strategically withdrawing funds during retirement to manage tax liability.

5. Business and Employment Decisions: Structuring business activities to take advantage of tax reliefs and making the most of tax thresholds, along with considering the tax implications of employment decisions, such as stock options or benefits.

6. Education Planning: Utilising family related tax credits and tax efficient savings accounts when it comes to saving for children and for their education.

7. Charitable Giving: Using tax reliefs available to you for charitable contributions.

If you want to work with a financial adviser who can provide valuable insights and help tailor strategies to your specific financial situation and goals you can find out more about our work by reading some client financial advice case studies or fill in one of our contact forms below.

Succession Planning, Inheritance Tax Planning & Estate Planning are not regulated by the Financial Conduct Authority

Author & Editor: Cherie-Anne Baxter, Marketing Director

Date Written: 10th February 2025

Date Updated: 19th February 2024

Approver: Quilter Financial Limited 19th February 2025

The content and details of this article are as accurate as the day it was written or updated.

 

 

 

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