Why “No Changes” in 2025/26 Could Quietly Cost You More: The Tax Freeze Effect
It’s easy to assume that no major announcements mean no major consequences. But in the case of the 2025/26 personal tax landscape, that couldn’t be further from the truth.
Despite the Chancellor’s Spring Statement introducing no headline-grabbing tax rises, a series of frozen thresholds, shrinking allowances, and rising income levels mean that millions will pay more tax next year — often without realising it.
At Merranti, we’re here to help you see the full picture — and take proactive steps before those hidden costs mount up.
Personal Allowance and Income Tax: The Quiet Freeze That Hurts
The personal allowance – the amount you can earn tax-free – remains fixed at £12,570, and the 40% tax band continues to start at £50,270. These thresholds have not moved since 2021 and will stay frozen until April 2028.
But inflation hasn’t frozen.
From February 2022 to February 2025, CPI inflation rose 17.5%. If the tax thresholds had risen accordingly, you’d now be able to earn:
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£14,770 tax-free
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And not hit 40% tax until £59,070
That’s a difference of over £9,000 — income that’s now being taxed unnecessarily.
The result? Even if your income hasn’t dramatically increased, you may already be paying hundreds (or thousands) more in tax than you should be.
The £100,000 Income Cliff: Marginal Rate Madness
Once your income exceeds £100,000, the government claws back your personal allowance — £1 lost for every £2 of extra income. By the time you hit £125,140, the allowance is gone completely.
This creates a hidden 60% marginal tax rate on income in that £100k–£125k band.
And if you’re in Scotland, where income tax rates are higher, the pain is even greater.
Example:
James earns £112,000 per year. That means:
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He loses £6,000 of personal allowance, costing him an extra £2,400 in tax.
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His effective tax rate on income in that band exceeds 60%.
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He also loses eligibility for tax-free childcare and possibly faces a Child Benefit clawback.
Dividend Income: Less Relief, Same High Tax
Dividends are a popular way for directors and investors to extract profits — but changes in recent years have drastically reduced the tax-free benefits.
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The Dividend Allowance was £5,000 in 2016.
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It was £2,000 in 2023.
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And now, it’s just £500 – and remains unchanged for 2025/26.
This means:
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Even a modest dividend will now trigger a tax charge.
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More people will be forced to file tax returns, even for relatively small investment income.
Dividend Tax Rates (Above £500):
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8.75% – Basic rate
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33.75% – Higher rate
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39.35% – Additional rate
For close company directors, the 33.75% rate also applies to outstanding director’s loans not repaid within nine months of year-end.
Example:
Emma owns shares in her business and takes a £10,000 dividend.
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Her first £500 is tax-free.
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The remaining £9,500 is taxed.
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If she’s a higher rate taxpayer, that’s £3,206 in tax – an increase compared to previous years when more of it was covered by the old £2,000 or £5,000 allowance.
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Savings Income: Interest Now Costs More Than You Think
With interest rates higher than they’ve been in years, many savers are finally earning decent returns. But that also means more of them will face a tax bill.
The Personal Savings Allowance (PSA) remains frozen:
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£1,000 for basic rate taxpayers
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£500 for higher rate taxpayers
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£0 for additional rate taxpayers
Even a standard ISA-paying savings account at 4% interest could exceed this limit quickly.
Example:
Tom has £25,000 in a regular savings account at 4.5% interest.
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That’s £1,125 of interest in the year.
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If he’s a basic rate taxpayer, only £1,000 is tax-free.
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He pays tax on the remaining £125 at 20% = £25.
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A higher rate taxpayer would pay tax on £625 at 40% = £250.
Small amounts, yes — but across millions of savers, this results in a major tax haul for HMRC.
Why It All Adds Up
Individually, these changes might seem minor. But together, they create a perfect storm of rising personal tax burdens, especially for:
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Business owners extracting dividends
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Families receiving child benefit
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Professionals earning £100,000+
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Anyone with savings or investment income
And perhaps most frustrating of all? These tax rises are silent. They don’t come from flashy Budget headlines — but from frozen thresholds, reduced allowances, and inflation doing the heavy lifting for HMRC.
What Can You Do?
Tax planning is no longer just for the wealthy — even middle earners can benefit significantly from reviewing how they receive income, structure savings, and utilise allowances.
At Merranti, we can help you:
Use pensions and gift aid to reduce adjusted net income
Move dividend-producing assets into ISAs or pensions
Restructure how you extract income from your business
Optimise your tax code to reflect interest or dividend changes
Minimise your HICBC or stay under key thresholds
Avoid being pulled into unnecessary self-assessment
Don’t Let Frozen Thresholds Catch You Off Guard
You might not see a big announcement in the news — but your tax bill will tell the story by April 2026.
