By proactively managing your personal allowances and reliefs, you can effectively minimise your tax bill and optimise your financial position for the 2025/26 tax year.
Minimising your personal tax bill
For the 2025/26 tax year, the standard Personal Allowance remains at £12,570, meaning you can earn up to this amount before paying Income Tax. Earnings above this threshold are taxed at rates of 20% (basic rate), 40% (higher rate), and 45% (additional rate) in England, Wales, and Northern Ireland. In Scotland, different tax bands apply.
If your income exceeds £100,000, your Personal Allowance decreases by £1 for every £2 earned over this limit. This effectively creates a 60% marginal tax rate on income between £100,000 and £125,140, as the entire Personal Allowance is withdrawn within this band.
Marriage allowance
If you’re married or in a civil partnership, and one partner has an income below the Personal Allowance while the other is a basic-rate taxpayer, you may benefit from the Marriage Allowance. This allows the lower-earning partner to transfer £1,260 of their unused Personal Allowance to their partner, potentially reducing the tax bill by up to £252.
Tax on savings and investments
- Personal savings allowance: Basic-rate taxpayers can earn up to £1,000 in savings interest tax-free, while higher-rate taxpayers have an allowance of £500. Additional-rate taxpayers do not receive this allowance.
- Dividend allowance: For the 2025/26 tax year, the Dividend Allowance remains at £500. Dividend income exceeding this amount is taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).
Key considerations
- Utilising allowances: Ensure both you and your spouse or civil partner fully utilise your Personal Allowances. Transferring income-generating assets between partners can help achieve this.
- Reducing high marginal tax rates: To retain your total Personal Allowance and avoid the 60% marginal tax rate, consider making pension contributions or charitable donations to reduce your adjusted net income below £100,000.
- Tax-efficient alternatives: To minimise tax liabilities, explore tax-efficient alternatives to bonuses or salary increases, such as employer pension contributions or salary sacrifice arrangements.
- Investments: The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offer generous income tax reliefs (30% for EIS and 50% for SEIS) while encouraging investment in early-stage companies. They can be particularly effective in reducing personal tax liabilities and are worth considering as part of a broader tax strategy.
- Rent-a-Room relief: If you rent out a furnished room in your home, you can earn up to £7,500 tax-free under the Rent-a-Room scheme.
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.