Income tax planning: tax thresholds and planning opportunities

Income tax planning remains a key area of focus, particularly as many tax thresholds continue to be frozen, bringing more taxpayers into higher rates over time through so-called “fiscal drag”. Although headline tax rates may appear unchanged, the effect of rising incomes against static thresholds can significantly increase tax liabilities if no planning is undertaken.

Income tax thresholds for 2026/27

For 2026/27, income tax thresholds (except possibly in Scotland) are expected to remain unchanged. The main UK-wide thresholds are:

• Personal Allowance (PA): £12,570
  Income up to this level is not subject to income tax.
• Higher rate threshold: £50,270
  Income above this level is generally taxed at 40%, rather than the basic rate of 20%.
• Additional rate threshold: £125,140
  Income above this level is taxed at 45%.

The continued freezing of these thresholds means that even modest pay rises, bonuses or additional income can push individuals into higher tax bands over time. As a result, reviewing income levels and understanding where they fall in relation to these thresholds is increasingly important.

Scottish income tax rates and bands

Scotland continues to operate a separate income tax regime for non-savings, non-dividend income, such as employment income, self-employment profits, rental income and pension income. Savings and dividend income are still taxed at UK-wide rates.

Many Scottish taxpayers now pay a higher overall amount of income tax than those elsewhere in the UK, particularly at middle and higher income levels, although some lower earners pay slightly less.

Scottish rates and bands for 2025/26

Changes for 2026/27

For 2026/27, only the starter and basic rate thresholds are expected to increase:

• The 19% starter rate band will extend to £16,537
• The 20% basic rate band will extend to £29,526

All other thresholds and rates are expected to remain unchanged. While this provides some relief to lower earners, those with incomes above these levels will continue to face relatively high marginal tax rates compared with the rest of the UK.

Dividend tax rates: increases from 6 April 2026

Dividend income is subject to its own set of tax rates, which are due to increase from 6 April 2026. This has important implications for company owners and investors who receive dividend income outside tax-free wrappers such as ISAs or pensions.

From 6 April 2026:

• Dividends within the basic rate band will be taxed at 10.75%, increasing from 8.75%
• Dividends within the higher rate band will be taxed at 35.75%, increasing from 33.75%

There will be no change to:

• The additional rate dividend tax, which will remain at 39.35%
• The dividend allowance, which will continue to tax the first £500 of dividend income at 0%

Although the dividend allowance remains in place, it is now very small, meaning that most dividend income is subject to tax. The forthcoming rate increases therefore strengthen the case for reviewing the timing of dividends and considering whether income can be brought forward or sheltered more effectively.

Withdrawal of the Personal Allowance

The Personal Allowance of £12,570 is withdrawn once income exceeds £100,000. For every £2 of income above this level, £1 of Personal Allowance is lost. As a result:

• The Personal Allowance is fully eliminated when income reaches £125,140
• Income between £100,000 and £125,140 is subject to an effective marginal tax rate of 60% for UK taxpayers

This marginal rate arises because income tax is paid at 40% while the loss of the Personal Allowance effectively adds a further 20% charge.

The position is different in Scotland, due to the different tax rates, and also differs where income in this band consists of dividends, which are taxed at dividend rates rather than employment income rates. Nevertheless, the £100,000 to £125,140 income band is one of the most penal areas of the tax system and a key focus for planning.

Key income tax planning points

Reducing taxable income around key thresholds

It is often worthwhile to consider reducing taxable income, particularly where income falls just above a significant threshold. Common planning tools include:

• Pension contributions, which reduce adjusted net income and can help preserve the Personal Allowance
• Gift Aid donations, which extend the basic rate band and reduce adjusted net income for allowance purposes

These measures can be especially effective for individuals with income just above £50,270 or £100,000.

Managing income that can be moved between tax years

Some types of income can be timed or moved between tax years, allowing greater control over when tax is paid. Examples include:

• Bonuses from your own company
• Dividends paid by your company
• Withdrawals from pension drawdown arrangements

Careful timing can help keep income within lower tax bands, avoid loss of allowances and reduce exposure to higher marginal rates.

Accelerating dividends before 6 April 2026

Company owners who are basic or higher rate taxpayers should consider whether it is appropriate to bring forward dividend payments so that they are received before 6 April 2026, when higher dividend tax rates take effect.

However, care must be taken to ensure that:

• The additional income does not push you into a higher tax band
• Income does not exceed £60,000, which could trigger or increase the High-Income Child Benefit Charge (HICBC)

The HICBC applies where one partner’s income exceeds £60,000 and can claw back Child Benefit in full once income reaches £80,000. This makes income planning particularly important for families with children.

Shifting income between spouses

In some cases, income can be shifted between spouses or civil partners to ensure that both individuals’ Personal Allowances and lower tax bands are used effectively. While this is not always straightforward, permissible methods can include:

• Making an outright gift of income-producing investments
• Holding savings or investments in joint names and sharing the resulting income
• Employing a spouse or partner in a business, provided the role is genuine and remuneration is commercially reasonable

HMRC may challenge arrangements they believe are artificial or not commercially genuine, so it is important that any planning is properly structured and supported by evidence. Professional advice should always be taken before implementing income-shifting strategies.

Managing exposure to the High-Income Child Benefit Charge

For families with children, income planning can play a crucial role in managing the High-Income Child Benefit Charge. Where possible, it may be beneficial to:

• Shift income between spouses so that neither exceeds the £60,000 threshold
• Use pension contributions or Gift Aid donations to reduce adjusted net income

Even modest planning can prevent a partial or full clawback of Child Benefit, which can otherwise result in a very high effective marginal tax rate.

Final thoughts

With income tax thresholds frozen, dividend tax rates rising and allowances being steadily eroded, income tax planning has become more important than ever. Small changes in income can now have disproportionate tax consequences, particularly around key thresholds such as £50,270, £60,000 and £100,000.

While not every strategy will be suitable for every individual, understanding how the rules operate and reviewing your position regularly can help ensure that you do not pay more tax than necessary. Professional advice should always be sought to ensure that any planning is appropriate, effective and fully compliant with HMRC requirements. Book a 30 minute meeting to discuss with us