UK Tax rates and thresholds. Summary guide

As we move into the 2025/26 tax year, it's essential for individuals and businesses alike to stay informed about the changes in UK tax rates and thresholds. This guide will help you navigate the key updates in personal income tax, National Insurance, capital gains tax, inheritance tax, and more. Understanding these changes is crucial for effective financial planning, whether you're a taxpayer or a bookkeeper assisting clients with their finances.

Key Takeaways

• Personal income tax thresholds are frozen until 2028, impacting taxpayers as earnings rise.

• National Insurance contributions will increase from April 2025, affecting both employers and employees.

• Capital Gains Tax rates have risen, making it important for investors to plan ahead.

• Inheritance Tax thresholds remain unchanged until 2030, highlighting the need for effective estate planning.

• Stamp duty rates are set to change, which will affect property buyers significantly starting in 2025.

Understanding Personal Income Tax Changes

As we move further into 2025, it's important to get to grips with the changes affecting personal income tax. The Autumn Budget 2024 brought about some key decisions that will impact us taxpayers in the coming years. A big one is the freezing of tax bands and allowances, which is expected to affect more and more of us as time goes on. Let's break it down.

Frozen Tax Allowances and Rates

The main personal allowance and the 40% higher rate threshold are set to stay put at their 2022/23 levels until at least 2028. This freeze, often called a 'stealth tax', essentially means the government collects more tax each year without actually raising the rates themselves. It's a sneaky way of increasing revenue, and it's something we all need to be aware of.

Impact of Higher Earnings

Let's look at an example. Say you earn £50,270 in 2024/25 and pay around £7,540 in income tax. If your income then increases by 10% to £55,297 before 2028, that entire extra amount will be taxed at 40%. This would bump up your total income tax to £9,551. For those of us earning more, the personal allowance starts to decrease once you earn over £100,000 and disappears completely at £125,140, pushing you into the 45% tax bracket. In this 'tapering band', the effective marginal rate can be as high as 60%. It means any extra income could lead to a surprisingly high tax bill, especially if you're close to that threshold. It's worth checking out the UK Income Tax tables to understand how these thresholds affect different income levels.

High Income Child Benefit Charge

The High Income Child Benefit Charge (HICBC) is still in place. If you're the higher-earning partner in a household receiving Child Benefit and you earn over £60,000, you'll be affected. For every £200 of income between £60,000 and £80,000, 1% of the total benefit is reclaimed. Once you hit £80,000, the entire benefit is clawed back. There was talk of calculating this based on the household's combined income, but the Chancellor decided against it, so it's still based on individual earnings.

It's important to keep an eye on these changes and plan accordingly. With allowances frozen and thresholds remaining the same, even a small pay rise could push you into a higher tax bracket. Understanding how these changes affect you personally is key to managing your finances effectively.

National Insurance Contributions Overview

Okay, let's talk National Insurance Contributions (NICs). It's something that affects pretty much everyone, whether you're employed or running a business. There have been a few changes announced recently, so I thought I'd break them down to make things a bit clearer.

Changes to Employee NICs

So, for employees, the big thing to keep an eye on is that the thresholds for when you start paying NICs are likely to stay frozen. What this means is that as wages increase with inflation, more of your pay could end up being taxed at a higher rate. It's a bit of a 'stealth tax' kind of thing. The government did reduce the Class 1 NI rate twice in 2024, first from 12% to 10%, and then again to 8%. This has given some workers a bit of a boost in their take-home pay.

Here's a quick rundown of how the current rates work:

• If you earn between £1,048 and £4,189 a month, you pay NI at 8%.

• If you earn over £4,189 a month, the rate drops to 2% on the portion above that limit.

• These contributions are automatically deducted through PAYE, calculated each pay period.

Employer NICs Adjustments

Now, for the employers out there, there are some pretty significant changes coming. The rate of secondary Class 1 NICs is set to increase from 13.8% to 15% from April 6, 2025. On top of that, the threshold at which employers start paying NICs for their employees is dropping from £9,100 a year to £5,000 a year. This means businesses will be paying more for every employee. It's expected that businesses will have to pay approximately £770 more in NI for each minimum wage worker, while employees earning a median salary will cost their employers an additional £900 per year. It's a big increase in costs, no doubt about it. Businesses may need to raise prices for customers to offset the increased costs.

Employment Allowance Updates

There's a bit of good news for smaller businesses, though. The Employment Allowance is going up from £5,000 to £10,500. Plus, they're scrapping the £100,000 eligibility threshold. This means that more businesses, regardless of their size, should be able to apply for this allowance, as long as they pay above the NICs secondary threshold for two or more employees. It's worth noting that all other eligibility requirements remain the same. To be eligible you must be a registered employer, be either a business, a charity with employees or a have more than two directors earning over the secondary threshold for class 1 National insurance.

It's important to keep an eye on these changes and make sure your payroll systems are up to date. It might be worth getting some professional advice to make sure you're claiming all the allowances you're entitled to and minimising your NIC liability.

Capital Gains Tax Adjustments

Capital Gains Tax (CGT) can feel like a bit of a minefield, but it's something I need to keep on top of as an investor. It's basically the tax I pay on the profit I make when I sell or dispose of an asset that's increased in value. The rules around CGT are always subject to change, so it's important to stay informed.

Current CGT Rates

OK, so here's the deal with current CGT rates. The rates depend on my income tax band. For the higher and additional rate taxpayers among us, the CGT rate is higher than for basic rate taxpayers. Also, the type of asset I'm selling makes a difference. For example, gains from residential property are taxed at different rates than gains from other assets, like shares. It's worth noting that there's an annual CGT allowance, which is the amount of profit I can make before I start paying CGT. This allowance has been subject to reductions recently, so it's lower than it used to be. Make sure you check the current CGT rates before selling any assets.

Impact on Investors

These CGT adjustments can really affect my investment strategies. A higher CGT rate means I'll be paying more tax on my profits, which can reduce my overall returns. This might make me think twice about selling certain assets, or it might encourage me to hold onto them for longer to avoid triggering a tax liability. Plus, with the reduced annual allowance, it's more important than ever to keep track of my gains and losses throughout the year. Here are a few things I'm keeping in mind:

• Reviewing my portfolio regularly to identify potential CGT liabilities.

• Considering tax-efficient investment options, like ISAs, where gains are tax-free.

• Offsetting capital losses against capital gains to reduce my overall tax bill.

It's a good idea to keep detailed records of all my investment transactions, including purchase prices, sale prices, and any associated costs. This will make it easier to calculate my capital gains and losses accurately when it comes time to file my tax return.

Planning for CGT

Planning is key when it comes to CGT. I'm always looking for ways to minimise my tax liability while still achieving my investment goals. One strategy I use is to spread out my disposals over multiple tax years to make use of the annual allowance each year. Another thing I do is consider transferring assets to my spouse or civil partner, as they may be in a lower tax bracket. Of course, it's always a good idea to seek professional advice from a tax advisor to make sure I'm making the most of all available allowances and reliefs. Here's a quick checklist I use:

1. Understand the current CGT rates and allowances.

2. Keep detailed records of all investment transactions.

3. Consider tax-efficient investment strategies.

Inheritance Tax Regulations

Inheritance Tax (IHT) can seem daunting, but it's something I need to understand to plan for the future. The rules determine how much tax is paid on my estate when I pass it on. It's not the cheeriest topic, but getting to grips with it can make a big difference for my loved ones.

Current IHT Thresholds

The current IHT threshold is frozen at £325,000 until 2030. This means that if my estate is worth more than this, the excess will be taxed at 40%. There's also a residence nil-rate band, which can add an extra £175,000 if I'm passing on my home to direct descendants. It's worth noting that these thresholds have been frozen for a while, and with property prices rising, more estates are likely to be caught by IHT. Understanding the tax-free inheritance is crucial for estate planning.

Impact on Investors

For investors, IHT can have a significant impact on the value of their portfolios passed on to beneficiaries. Investments held outside of tax-efficient wrappers like ISAs will be included in the estate and potentially subject to IHT. This makes it important to consider the tax implications of different investment strategies and to explore options for mitigating IHT liabilities. For example, gifting assets during my lifetime could reduce the value of my estate, but there are rules around this to be aware of.

Planning for Inheritance Tax

Planning for IHT involves several strategies that I should consider:

• Making Gifts: Gifting assets during my lifetime can reduce the value of my estate. There are annual gift allowances and exemptions for certain types of gifts.

• Using Trusts: Trusts can be used to hold assets outside of my estate, providing a way to pass wealth on to future generations while potentially mitigating IHT.

• Pension Planning: A significant change is coming in April 2027, when pensions will be included as part of the taxable estate. This makes pension planning even more important.

It's important to keep detailed records of any gifts made, as these may need to be reported to HMRC. Seeking professional financial advice is crucial to ensure that any IHT planning strategies are appropriate for my individual circumstances and comply with all relevant tax rules.

Stamp Duty Changes for Property Purchases

Okay, so Stamp Duty Land Tax (SDLT) is about to change again, and it's going to affect anyone buying property in England and Northern Ireland. As someone trying to keep on top of all this, let me break it down.

New Thresholds for Buyers

From April 2025, the stamp duty thresholds are set to decrease. This means more people will likely end up paying stamp duty when they buy a home. The current threshold of £250,000 is going back down to £125,000. Basically, if you buy a property for more than £125,000, you'll be paying stamp duty. It's a pretty big shift, and it's worth getting your head around it if you're planning on moving.

Impact on First-Time Buyers

First-time buyers aren't getting away scot-free either. The threshold where they start paying stamp duty is also dropping, from £425,000 to £300,000. This is a significant change, especially for those trying to get on the property ladder in more expensive areas. It means saving up a bit more, or potentially looking at slightly cheaper properties. I'd recommend checking out the latest SDLT return guidance to make sure you're prepared.

Planning for Stamp Duty

With these changes coming, it's a good idea to factor stamp duty into your budget early on. Here's a few things to keep in mind:

• Know the Dates: The changes kick in from April 2025, so if you're buying before then, the current thresholds apply.

• Budget Accordingly: Work out how much stamp duty you'll owe based on the new thresholds. Don't get caught out!

• Seek Advice: If you're unsure, talk to a financial advisor or conveyancer. They can help you understand the implications and plan accordingly.

It's easy to feel a bit overwhelmed by all these tax changes, but staying informed is key. Knowing what's coming down the line means you can make better decisions and avoid any nasty surprises when it comes to buying property. Keep an eye on updates, and don't be afraid to ask for help if you need it.

Dividend and Savings Income Taxation

Reduced Dividend Allowance

The dividend allowance has taken a hit recently. For the current tax year, 2025/26, it's only £500. This is a big drop from the £2,000 allowance we had back in 2022/23. Basically, if you earn more than £500 in dividends, you'll need to declare it, as HMRC doesn't automatically track this income. The tax rates on dividends above that £500 threshold remain the same: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. It's worth considering tax-free investment options like ISAs or Venture Capital Trusts (VCTs) to shield your dividend income.

Savings Income Allowances

The savings allowance is still around, thankfully. If you're a basic rate taxpayer, you get a £1,000 allowance. Higher rate taxpayers get £500, and additional rate taxpayers, unfortunately, get nothing. If your savings income goes over these limits, you'll need to declare it. There's also a £5,000 savings rate band where savings income can be taxed at 0%, but non-savings income gets priority within that band. So, if your non-savings income doesn't use up the whole £5,000, your savings income within the remaining part of the band could benefit from that 0% rate.

Tax-Efficient Investment Options

With the dividend allowance shrinking and tax rates staying put, it's a good idea to look at tax-efficient ways to invest. Here are a few things I'm considering:

• ISAs: You can put up to £20,000 into an ISA each year, and any income or capital gains you make within the ISA are tax-free. This is a great way to protect your investments from tax.

• Pensions: Contributing to a pension is another tax-efficient option. You get tax relief on your contributions, and your investments grow tax-free. Plus, you can usually take 25% of your pension pot tax-free when you retire.

• Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) or Seed Enterprise Investment Schemes (SEIS): These offer tax reliefs, but they're also higher risk, so it's important to get advice before investing.

It's always a good idea to get professional advice when you're planning your taxes. A financial advisor can help you figure out the best strategies for your situation and make sure you're making the most of all the available allowances and reliefs.

Tax Planning Strategies for Individuals

Tax planning can feel like a chore, but it's essential to make sure I'm not paying more than I need to. With the tax landscape constantly shifting, staying informed and proactive is key. Here's how I'm approaching my tax planning this year.

Maximising Allowances

Making the most of my tax-free allowances is always my first step. It's like finding free money! Each year, I'm entitled to various allowances, and if I don't use them, I lose them. For example, the personal allowance is £12,570, meaning the first £12,570 of my income is tax-free. Then there's the dividend allowance, which is currently £500. I also keep an eye on the ISA allowance, which lets me save or invest up to £20,000 each year without paying income tax or capital gains tax on the returns.

• Personal Allowance: £12,570 (tax-free income)

• Dividend Allowance: £500 (tax-free dividends)

• ISA Allowance: £20,000 (tax-free savings and investments)

Pension Contributions Benefits

Pension contributions are a fantastic way to reduce my tax bill while saving for retirement. Contributions benefit from tax relief, whether I make them personally or through my employer. If I'm close to a higher tax band, increasing my pension contributions via salary sacrifice can lower my taxable income, potentially keeping me in a lower tax bracket. Plus, it's a great way to boost my retirement savings!

Claiming Employment Expenses

As an employee, I make sure to claim any allowable employment expenses. This can include professional subscriptions, working from home allowance (if my employer requires me to work from home), business miles travelled in my own vehicle, and uniform allowance for specific jobs. It's surprising how much these small claims can add up over the year. Keeping good records is essential, so I don't miss out on anything.

It's important to remember that tax rules can change, so I always double-check the latest information on the HMRC website or consult with a tax professional to ensure I'm taking advantage of all available opportunities and staying compliant.

Regional Variations in Tax Rates

As if UK taxes weren't complicated enough, things get even more interesting when you consider that some regions have the power to set their own income tax rates. It's not a free-for-all, but it does mean that where you live can affect how much tax you pay. Let's break down the key differences.

Scottish Income Tax Rates

Scotland has the power to set its own income tax rates and bands on non-savings and non-dividend income. This means that the amount of income tax you pay in Scotland might be different from what someone in England, Wales, or Northern Ireland pays. The Scottish government usually announces its budget, including any changes to income tax rates, around December. For example, the Scottish government’s budget announcement, scheduled for December 4, 2024, will clarify these rates for the 2025/26 tax year. It's worth keeping an eye on these announcements, as they can directly affect your take-home pay if you're a Scottish taxpayer.

Welsh Income Tax Updates

Like Scotland, Wales also has the ability to set its own income tax rates. However, so far, the Welsh government hasn't actually used this power to diverge from the rates set by the UK government. That could change, though. The Welsh government usually presents its draught budget in December, with the final version in February. Any changes to Welsh income tax would directly impact Welsh taxpayers, so it's important to stay informed. The upcoming draught Welsh Budget announcement on December 10, 2024, with finalisation scheduled for February 25, 2025, will be key to understanding any potential shifts.

Impact on Local Taxpayers

The regional variations in tax rates can have a significant impact on local taxpayers. For example, if Scotland sets higher income tax rates for middle-income earners, people in that income bracket would pay more tax than their counterparts in England. This can affect everything from disposable income to the attractiveness of the region for workers and businesses. It's also worth noting that these regional tax differences can influence local economies and public services. For instance, higher tax revenues in Scotland could fund additional public spending, while lower revenues might lead to budget cuts. Understanding these regional tax variations is crucial for effective tax planning and making informed financial decisions.

Staying informed about regional tax changes is essential, especially if you live in Scotland or Wales. These changes can affect your take-home pay and overall financial situation. Keep an eye on government announcements and consult with a tax professional to ensure you're making the most of any available allowances and reliefs.

Here's a quick summary of what to keep in mind:

• Scotland: Sets its own income tax rates and bands.

• Wales: Has the power to set income tax rates but hasn't diverged from UK rates yet.

• Impact: Regional tax differences can affect disposable income and local economies.

Tax rates can be different depending on where you live. Each region has its own rules, which can make things a bit tricky. If you want to learn more about how these tax rates vary and what it means for you, visit our website for more information. We’re here to help you understand your taxes better!

Final Thoughts on UK Tax Rates and Thresholds

As we wrap up this guide on UK tax rates and thresholds, it’s clear that staying informed is key. With changes on the horizon, especially around income tax, National Insurance, and capital gains tax, it’s important to keep an eye on how these might affect your finances. The freezing of allowances until 2028 means many of us could end up paying more tax over time, even without any rate increases. So, whether you’re a business owner or just managing your personal finances, planning ahead is crucial. Don’t hesitate to seek advice if you’re unsure about how these changes impact you. Keeping your tax affairs in order can save you money and stress in the long run.

Frequently Asked Questions

What are the current personal income tax rates in the UK?

For the 2025/26 tax year, the personal allowance remains at £12,570, and the higher rate threshold is £50,270. Income above this is taxed at 40%, and income above £150,000 is taxed at 45%.

How does the High Income Child Benefit Charge work?

If you earn over £60,000 and receive Child Benefit, you'll start to lose some of it. For every £200 you earn over £60,000, 1% of your benefit is taken back until you earn £80,000, where it is fully reclaimed.

What changes are happening to National Insurance contributions?

From April 2025, the rate for employer National Insurance will increase from 13.8% to 15%, and the threshold at which employers start paying will drop from £9,100 to £5,000.

What is the current Capital Gains Tax rate?

For the 2025/26 tax year, Capital Gains Tax is set at 18% for basic rate taxpayers and 28% for higher rate taxpayers.

What are the inheritance tax thresholds?

The main inheritance tax threshold is £325,000, which will remain unchanged until 2030. You can also pass on an additional £175,000 if you leave your home to your children or grandchildren.

How can I reduce my tax bill through tax planning?

You can reduce your tax bill by making use of your allowances, contributing to pensions, and ensuring you claim all allowable expenses. Consulting with a tax professional can also help you find the best strategies.