Income Tax Planning for 2026/27

With income tax thresholds largely frozen again for 2026/27 and dividend tax rates set to increase from 6 April 2026, careful planning is more important than ever.

Fiscal drag continues to pull more individuals into higher tax bands each year, and for some taxpayers — particularly those in Scotland or those with income above £100,000 — effective marginal tax rates can be surprisingly high.

Below we outline the key income tax thresholds for 2026/27 and the practical planning opportunities to consider before the new tax year begins.

Income Tax Thresholds for 2026/27

Income tax thresholds (except possibly in Scotland) are set to remain unchanged for 2026/27.

For taxpayers in England, Wales and Northern Ireland:

• Personal Allowance (PA): £12,570
• Higher rate threshold: £50,270
• Additional rate threshold: £125,140

This means:

• Income up to £12,570 is tax-free (subject to tapering).
• Income between £12,571 and £50,270 is taxed at 20%.
• Income between £50,271 and £125,140 is taxed at 40%.
• Income above £125,140 is taxed at 45%.

With thresholds frozen, pay rises alone may push individuals into higher bands — without any real increase in spending power.

Scottish Income Tax for 2026/27

Scotland operates a different tax structure for non-savings, non-dividend income (such as employment income, pensions, business profits and rental income).

Many Scottish taxpayers now pay more tax than those elsewhere in the UK — particularly middle and higher earners.

For 2025/26, Scottish rates and bands are:

For 2026/27:

• The 19% threshold rises to £16,537
• The 20% threshold rises to £29,526
• All other thresholds remain unchanged

Savings and dividend income in Scotland are taxed at UK-wide rates.

Dividend Tax Rates Increasing from 6 April 2026

A key planning point for owner-managed businesses is the scheduled dividend tax rate increase.

From 6 April 2026:

• Basic rate dividend tax increases from 8.75% to 10.75%
• Higher rate dividend tax increases from 33.75% to 35.75%
• Additional rate dividend tax remains at 39.35%

There is no change to:

• The dividend allowance (£500)
• The additional rate dividend tax rate

This means extracting profits via dividends will become more expensive from April 2026.

For company directors, this may justify reviewing dividend timing before the end of the 2025/26 tax year.

The Personal Allowance Trap – 60% Effective Tax

The Personal Allowance (£12,570) is gradually withdrawn once income exceeds £100,000.

It is reduced by £1 for every £2 of income above £100,000.

This creates:

• An effective 60% marginal tax rate on income between £100,000 and £125,140.

Example:

If income increases from £100,000 to £110,000:

• £10,000 is taxed at 40% (£4,000)
• £5,000 of Personal Allowance is lost
• That £5,000 is taxed at 40% (£2,000)

Total additional tax: £6,000
Effective marginal rate: 60%

In Scotland, the marginal rate may differ slightly depending on band interaction.

This is one of the most important income tax planning areas.

Key Income Tax Planning Opportunities

With thresholds frozen and dividend rates increasing, proactive planning can significantly reduce liabilities.

1. Pension Contributions

Pension contributions:

• Extend the basic rate band
• Reduce adjusted net income
• Help preserve Personal Allowance
• Reduce High Income Child Benefit Charge exposure

For those near £100,000, pension contributions can reduce the effective 60% tax rate.

Example:
If income is £110,000, a £10,000 gross pension contribution can:

• Restore Personal Allowance
• Reduce taxable income
• Save up to £6,000 in income tax

This is one of the most tax-efficient strategies available.

2. Gift Aid Donations

Gift Aid works similarly to pension contributions by:

• Extending the basic rate band
• Reducing adjusted net income

This can help:

• Avoid the 60% trap
• Reduce higher rate exposure
• Mitigate Child Benefit clawback

3. Dividend Timing for Company Directors

With dividend tax rates increasing from April 2026, directors may consider:

• Accelerating dividend payments into 2025/26
• Using unused basic rate band
• Utilising spouse dividend planning where appropriate

However, this must be balanced against:

• Corporation tax implications
• Cash flow needs
• Future profit expectations

4. Income Shifting Within Families

Where appropriate and commercially justified:

• Share ownership structures can be reviewed
• Dividend income may be allocated more efficiently
• Basic rate bands and allowances can be utilised

This is particularly relevant in family companies.

5. Managing Threshold Cliffs

Key income thresholds to monitor:

• £50,270 (higher rate entry)
• £100,000 (Personal Allowance taper)
• £125,140 (additional rate)
• £60,000–£80,000 (High Income Child Benefit Charge band)

Even small reductions in taxable income can prevent disproportionate tax increases.

High Income Child Benefit Charge (HICBC)

The HICBC applies where adjusted net income exceeds £60,000.

It claws back 1% of child benefit for every £200 of income between £60,000 and £80,000.

At £80,000, child benefit is fully repaid.

This is another area where pension contributions can reduce overall tax exposure.

Scottish Taxpayers: Additional Considerations

Scottish taxpayers face:

• A 42% rate beginning at £43,663
• A 45% rate beginning at £75,001
• A 48% top rate above £125,140

This means higher earners in Scotland often pay more tax than elsewhere in the UK.

Dividend income remains taxed at UK rates, so incorporation strategies may need to be reviewed carefully for Scottish clients.

Fiscal Drag: The Hidden Tax Rise

Although headline rates have not dramatically increased (aside from dividends), frozen thresholds mean:

• More taxpayers move into higher bands each year
• More individuals lose Personal Allowance
• More families are caught by the Child Benefit charge

This silent increase is known as fiscal drag.

Without planning, tax bills naturally rise over time.

Final Thoughts

With income tax thresholds frozen for 2026/27 and dividend tax rates increasing from April 2026, this is an ideal time to review your position.

Particular attention should be paid if:

• Your income is approaching £50,270 or £100,000
• You are a company director extracting dividends
• You are a Scottish taxpayer
• You receive child benefit
• You have flexibility over income timing

Small adjustments can produce substantial tax savings.

If you would like a personalised income tax review or dividend strategy assessment, Merranti Accounting can help you plan efficiently before the new tax year begins.