Index of the Article:
Summary of Key Points of the Article:
Understanding Income Tax Brackets and Rates for 2025-2026
Income tax is one of the most important financial obligations for individuals and businesses in the UK. Whether you're employed, self-employed, or running a business, understanding income tax brackets and rates is crucial for budgeting, financial planning, and ensuring compliance with HMRC regulations.
For the 2025-2026 tax year, the UK government has kept income tax rates and bands unchanged from the 2024-2025 tax year. This means individuals earning within specific thresholds will continue to pay tax at the same rates. However, there are still critical factors to consider, such as personal allowances, tax-free earnings, and additional taxes on high earners.
This guide will cover everything UK taxpayers need to know about income tax brackets and rates for the 2025-2026 financial year.
What Are the UK Income Tax Brackets for 2025-2026?
The income tax system in the UK is structured into progressive tax bands, meaning the more you earn, the higher the tax rate you pay. As of April 6, 2025, the following income tax rates apply in England, Wales, and Northern Ireland:
Tax Band | Taxable Income Range | Tax Rate |
Personal Allowance | Up to £12,570 | 0% (Tax-Free) |
Basic Rate | £12,571 – £50,270 | 20% |
Higher Rate | £50,271 – £125,140 | 40% |
Additional Rate | Above £125,140 | 45% |
📌 Important Notes:
Personal Allowance Reduction: If your total income exceeds £100,000, you start to lose your personal allowance at a rate of £1 for every £2 earned over £100,000. This means that by the time your income reaches £125,140, your entire £12,570 personal allowance is lost.
No Increase in Tax Bands: The government has kept these tax thresholds frozen since the 2021-2022 tax year. This means more people are being pushed into higher tax brackets due to wage inflation—a concept known as fiscal drag.
How Much Income Tax Will You Pay in 2025-2026? (Examples)
To make things clearer, let’s go through some real-life scenarios of how much tax a person would owe based on their income:
Example 1: An Employee Earning £40,000
Personal Allowance: £12,570 (Tax-Free)
Basic Rate Tax (20%) on £27,430 (£40,000 - £12,570) = £5,486
Total Tax Payable = £5,486
Example 2: A High Earner on £120,000
Personal Allowance Reduction: £12,570 is reduced by £10,000 (£120,000 - £100,000 ÷ 2) = £2,570
Taxable Income: £120,000 - £2,570 = £117,430
Basic Rate Tax (20%) on £37,700 (£50,270 - £12,570) = £7,540
Higher Rate Tax (40%) on £67,160 (£117,430 - £50,270) = £26,864
Total Tax Payable = £34,404
Example 3: A Top Earner Making £150,000
Personal Allowance: Fully removed (because earnings exceed £125,140)
Basic Rate Tax (20%) on £37,700 = £7,540
Higher Rate Tax (40%) on £74,870 (£125,140 - £50,270) = £29,948
Additional Rate Tax (45%) on £24,860 (£150,000 - £125,140) = £11,187
Total Tax Payable = £48,675
📌 Key Takeaways from These Examples:
The loss of the personal allowance for high earners significantly increases their tax burden.
The jump from the basic rate (20%) to the higher rate (40%) at £50,271 is substantial.
Earning above £125,140 means paying the highest additional rate of 45% with no personal allowance.
How Income Tax Works in Scotland for 2025-2026
Scotland has a different income tax system with five bands instead of three, which means Scottish taxpayers could pay different rates compared to those in England, Wales, and Northern Ireland.
For 2025-2026, Scotland’s tax bands are:
Tax Band | Income Range | Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Starter Rate | £12,571 – £14,732 | 19% |
Basic Rate | £14,733 – £25,688 | 20% |
Intermediate Rate | £25,689 – £43,662 | 21% |
Higher Rate | £43,663 – £125,140 | 42% |
Top Rate | Above £125,140 | 47% |
📌 Scottish taxpayers earning between £43,663 and £125,140 pay a 42% tax rate instead of 40% in the rest of the UK.
📌 The top rate in Scotland is 47%, which is higher than the 45% additional rate in England, Wales, and Northern Ireland.
Why the UK Income Tax Brackets Matter in 2025-2026
The UK government's decision to freeze tax thresholds since 2021 means that more individuals are paying higher taxes without an increase in real wages. This policy, combined with inflation and cost-of-living pressures, affects workers across all income levels.
Fiscal Drag: Since salaries are rising due to inflation, but tax bands remain unchanged, many taxpayers are pushed into higher tax brackets even though their purchasing power hasn't necessarily increased.
🚀 Tip: If you're moving into a higher tax bracket due to a salary increase, consider salary sacrifice schemes, pension contributions, and other tax-efficient strategies to reduce your taxable income.
Tax-Free Allowances and Deductions in the UK for 2025-2026
Understanding tax-free allowances and deductions can significantly reduce your tax bill in the UK. While income tax bands determine how much tax you owe, various allowances and reliefs help you legally lower your taxable income. In this section, we will break down the key tax-free allowances, explain how they work, and provide practical strategies to optimize your tax position in the 2025-2026 tax year.
1. The Personal Allowance: £12,570 Tax-Free Earnings
The Personal Allowance is the amount of income you can earn before paying any tax. In the 2025-2026 tax year, the personal allowance remains frozen at £12,570.
📌 Key Points:
If your total income is below £12,570, you do not pay income tax.
If your earnings exceed £100,000, you lose £1 of your personal allowance for every £2 earned above this threshold.
If your income reaches £125,140, your entire personal allowance is lost.
📝 Example:
If you earn £110,000, your personal allowance reduces by £5,000 (£10,000 ÷ 2), leaving you with £7,570 tax-free.
If you earn £130,000, your personal allowance is fully removed, and all your income is taxable.
2. Blind Person’s Allowance (BPA)
The Blind Person’s Allowance is an additional tax-free allowance for individuals who are registered as severely sight-impaired.
📌 Key Points:
Allowance for 2025-2026: £3,070
Total tax-free income for eligible individuals: £15,640 (£12,570 + £3,070)
📝 Example:
If you qualify for the Blind Person’s Allowance and earn £15,000, you will not pay any income tax because your total tax-free threshold is £15,640.
3. Marriage Allowance: Tax Relief for Couples
If you’re married or in a civil partnership, you can transfer up to £1,260 of your personal allowance to your partner, potentially saving up to £252 per year in tax.
📌 Eligibility:
One partner must earn less than £12,570 (below the personal allowance threshold).
The other partner must be a basic rate taxpayer (earning between £12,571 and £50,270).
📝 Example:
If John earns £10,000 (below the tax-free threshold) and Sarah earns £30,000, John can transfer £1,260 of his personal allowance to Sarah.
Sarah’s taxable income reduces from £30,000 to £28,740, leading to £252 in tax savings.
💡 How to claim? Apply for Marriage Allowance through the HMRC website: Claim Marriage Allowance
4. Dividend Allowance: Tax-Free Income from Shares
If you own shares in a company or receive dividend payments from investments, you get a tax-free dividend allowance.
📌 Dividend Allowance for 2025-2026: £500
📌 Tax Rates on Dividends Beyond Allowance:
Basic rate taxpayers (earnings up to £50,270) = 8.75% tax
Higher rate taxpayers (£50,271 - £125,140) = 33.75% tax
Additional rate taxpayers (over £125,140) = 39.35% tax
📝 Example:
If you receive £2,000 in dividends:
£500 is tax-free.
£1,500 is taxable at 8.75% (if you're a basic rate taxpayer) = £131.25 tax due.
5. Savings Allowance: Tax-Free Interest on Savings
The Personal Savings Allowance (PSA) allows individuals to earn interest on savings tax-free.
📌 Personal Savings Allowance for 2025-2026:
Basic rate taxpayers: £1,000 tax-free savings interest.
Higher rate taxpayers: £500 tax-free savings interest.
Additional rate taxpayers (over £125,140): £0 allowance (fully taxed on all savings interest).
📝 Example:
If you’re a basic rate taxpayer and earn £800 in interest, no tax is due.
If you’re a higher rate taxpayer and earn £1,200 in interest, £700 is taxable at 40%, meaning you owe £280 in tax.
💡 Tip: Use ISA accounts to earn interest tax-free beyond your savings allowance.
6. Trading Allowance: £1,000 Tax-Free Side Income
The trading allowance allows self-employed individuals and freelancers to earn up to £1,000 tax-free.
📌 Key Points:
If your side income is less than £1,000, you do not need to report it.
If your earnings exceed £1,000, you must register as self-employed and file a Self Assessment tax return.
📝 Example:
If you sell handmade crafts online and make £800 in a year, this is tax-free.
If you make £2,000, you can deduct £1,000 as the allowance and pay tax only on £1,000.
7. Property Income Allowance: £1,000 Tax-Free Rent
If you rent out a property (e.g., through Airbnb or renting a spare room), you get £1,000 tax-free rental income.
📌 Key Points:
If you earn less than £1,000 from property rental, no tax is due.
If you earn more than £1,000, you can either:
Deduct £1,000 as an expense (simplified method).
Deduct actual expenses (if they are higher).
📝 Example:
You rent out a spare room for £800 in a year → No tax is due.
You rent out a property for £5,000 → You can deduct £1,000 and pay tax on £4,000.
8. Rent-a-Room Scheme: Earn £7,500 Tax-Free
If you rent out a furnished room in your main home, you can earn up to £7,500 tax-free under the Rent-a-Room Scheme.
📌 Eligibility:
The room must be in your main home.
You must be renting it to a lodger (not a tenant with a separate agreement).
📝 Example:
If you rent out a spare bedroom for £6,000 per year, you pay no tax.
If you earn £10,000, only £2,500 is taxable.
💡 Tip: If you're co-owning the property, the tax-free limit is £3,750 per person.
9. How to Reduce Your Tax Bill (Smart Strategies)
Apart from using tax-free allowances, here are some powerful ways to reduce taxable income:
✅ Increase Pension Contributions:
Contributions to a pension scheme reduce your taxable income.
If you earn £55,000, contributing £5,000 into a pension brings your taxable income down to £50,000, keeping you in the basic tax rate.
✅ Use ISA Accounts:
All interest, dividends, and capital gains in an ISA are completely tax-free.
✅ Claim Work-From-Home Tax Relief:
If you work remotely, you can claim up to £312 per year as a tax deduction.
Taxation for Self-Employed Individuals, Freelancers, and Business Owners
If you’re self-employed, a freelancer, or run a business in the UK, your tax responsibilities differ from those of salaried employees. Unlike employees who have their taxes deducted automatically through PAYE (Pay As You Earn), self-employed individuals must calculate and pay their own tax and National Insurance Contributions (NICs).
This part of the guide covers everything you need to know about income tax for the self-employed, including National Insurance rates, business expenses, VAT thresholds, and tax-saving strategies for business owners.
1. Self-Employment Income Tax Rates for 2025-2026
As a self-employed individual or freelancer, you are taxed on your profits (income minus allowable business expenses). The income tax brackets are the same as for employees:
Tax Band | Taxable Income | Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic Rate | £12,571 – £50,270 | 20% |
Higher Rate | £50,271 – £125,140 | 40% |
Additional Rate | Above £125,140 | 45% |
📌 Key Point:
If your self-employment income is less than £1,000 per year, you do not need to register for self-assessment because of the Trading Allowance.
📝 Example:
If your freelance earnings are £40,000 and your allowable business expenses total £5,000, your taxable income is £35,000.
You pay:
0% tax on the first £12,570.
20% tax on the remaining £22,430 (£35,000 - £12,570).
Total tax owed: £4,486.
2. National Insurance Contributions (NICs) for the Self-Employed (2025-2026)
National Insurance (NI) is another mandatory contribution if you are self-employed. It helps fund state benefits such as the State Pension, NHS, and Maternity Allowance.
NIC Class | Who Pays? | Thresholds & Rates for 2025-2026 |
Class 2 NICs | Self-employed with profits over £12,570 | £3.45 per week |
Class 4 NICs | Self-employed with profits over £12,570 | 9% on profits between £12,570 - £50,270, then 2% on profits above £50,270 |
📌 Key Points:
If your profits are below £6,725, you do not need to pay Class 2 NICs, but you can still make voluntary contributions to qualify for State Pension.
Class 4 NICs are automatically calculated and paid via Self Assessment.
📝 Example:
If your self-employed profit is £40,000, you will pay:
Class 2 NICs: £3.45 × 52 weeks = £179.40.
Class 4 NICs:
9% on £27,430 (£40,000 - £12,570) = £2,468.70.
Total NICs: £2,648.10.
3. Tax-Deductible Business Expenses (Reduce Your Tax Bill)
As a self-employed individual, you can deduct business expenses from your income before calculating tax, which helps lower your taxable profits.
What Expenses Can You Deduct?
The following expenses are fully tax-deductible:
Category | Examples |
Office Costs | Stationery, printer ink, business phone bills |
Travel Expenses | Business mileage, fuel, train tickets, parking fees |
Marketing | Website hosting, advertising, social media ads |
Professional Fees | Accountant fees, business insurance |
Home Office Costs | If you work from home, you can claim a portion of rent, electricity, and internet bills |
Equipment & Tools | Laptops, software, work uniforms |
Employee Wages | If you hire staff, their salaries are tax-deductible |
📌 Key Tip:
Keep all receipts and invoices to support your tax deductions in case of an HMRC audit.
📝 Example:
If you earn £50,000 from freelancing but claim £10,000 in allowable expenses, your taxable income is reduced to £40,000, saving you thousands in tax.
4. VAT Thresholds for Businesses in 2025-2026
If your business turnover exceeds £90,000, you must register for VAT (Value Added Tax).
📌 VAT Thresholds for 2025-2026:
Registration threshold: £90,000.
Deregistration threshold: £88,000.
Standard VAT rate: 20%.
Should You Register for VAT?
✅ Yes, if:
Your turnover is above £90,000.
You want to reclaim VAT on business expenses.
❌ No, if:
Your turnover is below £90,000 (not required).
You sell VAT-exempt goods/services (e.g., private tuition, medical services).
💡 Tip: If your turnover is below £150,000, you may benefit from the VAT Flat Rate Scheme, which simplifies VAT calculations.
5. Self-Assessment: How to File Your Taxes
If you’re self-employed, you must submit a Self Assessment tax return each year to report your income and expenses.
📌 Key Deadlines for 2025-2026:
Deadline | What It’s For |
5 October 2025 | Register for Self Assessment (if newly self-employed) |
31 January 2026 | File tax return & pay income tax online |
31 July 2026 | Second payment on account (for some taxpayers) |
📝 Example:
If your 2025-2026 tax bill is £4,000, you may need to make two payments on account:
£2,000 by 31 January 2026.
£2,000 by 31 July 2026.
💡 Tip: Use HMRC’s online tax calculator to estimate your tax bill: Estimate your tax bill
6. Tax-Saving Tips for Self-Employed Individuals
✅ Use a Limited Company to Reduce Tax
As a sole trader, you pay up to 45% income tax + NICs.
If you set up a limited company, you pay 19% corporation tax + dividends (8.75%–39.35%), which can be more tax-efficient.
✅ Maximize Pension Contributions
Contributions to a self-employed pension reduce your taxable income.
The government adds 25% tax relief (e.g., you contribute £100, the government adds £25).
✅ Claim Work-From-Home Relief
If you work from home, you can claim simplified home expenses:
£10 per month for 25-50 hours/week.
£26 per month for 101+ hours/week.
Tax Planning for High Earners, Landlords, and Investors in the UK (2025-2026)
For high earners, landlords, and investors, tax planning is essential to minimize liabilities and maximize tax efficiency. The UK tax system includes various additional taxes such as Capital Gains Tax (CGT), Inheritance Tax (IHT), and Investment Taxation. Without proper planning, you could end up paying tens of thousands of pounds in unnecessary taxes.
In this section, we will break down the key taxes affecting high-income earners and investors and provide strategies to reduce tax liabilities in 2025-2026.
1. Higher Tax Burden on High Earners (Income Over £100,000)
If your annual income exceeds £100,000, you face a hidden tax trap—the gradual loss of your Personal Allowance.
📌 Key Impacts:
For every £2 earned over £100,000, you lose £1 of your Personal Allowance.
Once your earnings reach £125,140, your entire Personal Allowance is gone.
This creates an effective 60% tax rate on earnings between £100,000 and £125,140.
📝 Example:
If your income is £110,000, you lose £5,000 of your Personal Allowance.
This means £5,000 becomes taxable at 40%, leading to an extra £2,000 in tax.
The effective tax rate on this £10,000 income is actually 60% due to the lost allowance.
💡 Tax Planning Strategy: Reduce Your Taxable Income
To avoid the 60% tax trap:
✅ Make additional pension contributions (reduces taxable income).
✅ Use salary sacrifice for workplace benefits (e.g., electric car schemes, childcare vouchers).
✅ Donate to charity using Gift Aid (charitable donations reduce taxable income).
2. Capital Gains Tax (CGT) on Property and Investments
If you sell an asset such as a second home, stocks, or valuable assets, you may owe Capital Gains Tax (CGT) on the profit.
📌 CGT Allowance for 2025-2026:
£3,000 tax-free for individuals (down from £6,000 in 2024).
Married couples can combine allowances for £6,000 tax-free gains.
📌 CGT Rates:
Asset Sold | Basic Rate Taxpayer (Up to £50,270) | Higher/Additional Rate Taxpayer (£50,271+) |
Shares & Stocks | 10% | 20% |
Second Homes & Buy-to-Let | 18% | 24% |
📝 Example:
You sell a rental property for a £50,000 profit.
You are a higher rate taxpayer → £50,000 - £3,000 tax-free = £47,000 taxable gain.
CGT owed: 24% of £47,000 = £11,280.
💡 How to Reduce CGT:
✅ Use your CGT allowance every year by spreading gains across multiple years.
✅ Transfer assets to a spouse before selling to double the allowance (£6,000 tax-free).
✅ Invest in ISAs or pensions (capital gains inside ISAs and pensions are tax-free).
✅ Sell assets in a lower-income year to pay CGT at 10% instead of 20%/24%.
3. Property Taxation for Landlords (Buy-to-Let Tax Rules)
If you own rental properties, you will pay tax on rental income and potentially CGT when you sell.
Tax on Rental Income:
Tax Band | Tax Rate on Rental Profits |
Basic Rate (Up to £50,270) | 20% |
Higher Rate (£50,271 – £125,140) | 40% |
Additional Rate (Above £125,140) | 45% |
💡 Tax-Saving Tips for Landlords:
✅ Deduct allowable expenses: Mortgage interest, repairs, letting agent fees, insurance.
✅ Use a Limited Company: Buy-to-let properties owned by a Ltd company pay 19% corporation tax instead of up to 45% income tax.
✅ Split rental income with a lower-earning spouse (via a deed of trust to reduce tax).
✅ Use furnished holiday lets (FHLs) to qualify for business tax reliefs.
4. Inheritance Tax (IHT) and How to Protect Your Wealth
Inheritance Tax (IHT) is charged at 40% on estates worth over £325,000.
📌 IHT Allowances for 2025-2026:
£325,000 tax-free threshold (Nil Rate Band).
£175,000 additional allowance for main residence left to children/grandchildren.
Married couples can combine allowances to pass on £1 million tax-free.
📝 Example:
Your estate is worth £800,000, and you leave it to your children.
Tax-free allowances: £325,000 + £175,000 = £500,000.
Taxable estate: £800,000 - £500,000 = £300,000.
40% tax on £300,000 = £120,000 IHT bill.
💡 IHT Tax Planning Strategies:
✅ Give gifts to family members—you can gift £3,000 per year tax-free.
✅ Use Trusts to move assets outside your estate.
✅ Take out life insurance to cover IHT liabilities.
✅ Leave 10% of your estate to charity—this reduces your IHT rate to 36% instead of 40%.
5. Tax-Efficient Investments
Certain investments offer tax advantages, reducing the amount of tax you pay.
(a) ISAs: Tax-Free Savings and Investments
You can invest £20,000 per year in an ISA.
No income tax, dividend tax, or CGT on ISA investments.
💡 Tip:
Use Stocks & Shares ISAs to grow investments tax-free.
Lifetime ISAs provide a 25% government bonus (useful for first-time homebuyers).
(b) Pension Contributions: Huge Tax Benefits
Pension contributions reduce your taxable income, helping you avoid higher tax brackets.
The government adds 25% tax relief for basic rate taxpayers (higher rate taxpayers can claim 40%-45% relief).
📝 Example:
If you earn £60,000 and contribute £10,000 into a pension, your taxable income drops to £50,000, saving you £4,000 in tax.
💡 Tip:
Higher rate taxpayers can claim 40% tax relief via Self Assessment.
(c) Venture Capital Schemes (EIS & SEIS)
If you invest in startups and small businesses, you can benefit from tax relief through:
Enterprise Investment Scheme (EIS) – 30% income tax relief.
Seed Enterprise Investment Scheme (SEIS) – 50% income tax relief.
💡 Example:
Invest £10,000 in SEIS → Get £5,000 tax relief.
Tax Planning for Retirees, Pensioners, and How to Claim Tax Refunds
Retirement brings a shift in financial priorities, and understanding tax obligations during this phase is crucial. While many retirees believe their tax liabilities reduce automatically, pension income, savings, and investments are still subject to tax. Without careful planning, retirees can unintentionally overpay tax or miss out on valuable tax reliefs.
In this part of the guide, we will cover:
Income tax on pensions and retirement income
How to maximize tax efficiency in retirement
How to claim tax refunds if you have overpaid
1. Income Tax on Pension Income in 2025-2026
Even though you have stopped working, pension income is still taxable. The UK government treats pension withdrawals as regular income, meaning you may still owe tax depending on how much you withdraw.
How Pensions Are Taxed
All pension withdrawals fall under standard income tax bands.
Pension Income | Tax Rate |
Up to £12,570 | 0 percent (Personal Allowance) |
£12,571 to £50,270 | 20 percent (Basic Rate) |
£50,271 to £125,140 | 40 percent (Higher Rate) |
Above £125,140 | 45 percent (Additional Rate) |
Types of Pension Income and Their Tax Treatment
State Pension:
The full new State Pension in 2025-2026 is estimated to be around £11,500 per year.
It is taxable but paid without tax deducted, meaning you may need to pay tax via Self Assessment if you have other income.
Workplace and Private Pensions:
Taxed as regular income.
If you withdraw a large lump sum, you may push yourself into a higher tax bracket.
Tax-Free Pension Lump Sum:
You can withdraw 25 percent of your pension tax-free.
The remaining 75 percent is taxed as regular income.
Example: Tax on Pension Income
If you have:
State Pension income of £11,500
Private pension withdrawals of £20,000
Rental income of £8,000
Your total taxable income is £39,500.
£12,570 is tax-free under the Personal Allowance.
The remaining £26,930 is taxed at 20 percent.
You will owe £5,386 in income tax.
How to Reduce Tax on Pensions
To minimize tax in retirement, consider the following strategies:
Withdraw money strategically: Taking smaller withdrawals from private pensions can keep you in a lower tax bracket.
Delay State Pension: If you delay your State Pension, the payments increase and may be more tax-efficient later.
Use ISAs for tax-free income: Unlike pensions, withdrawals from ISAs are not taxable.
2. Tax-Free Allowances for Pensioners
Pensioners receive some special tax-free allowances to help reduce their tax burden.
Marriage Allowance
If one spouse earns less than £12,570, they can transfer £1,260 of their personal allowance to their partner, saving up to £252 per year.
Dividend and Savings Allowances
Dividend income up to £500 is tax-free.
Savings interest up to £1,000 is tax-free for basic rate taxpayers.
Rent-a-Room Scheme
If you rent out a room in your home, you can earn £7,500 per year tax-free.
3. How to Claim a Tax Refund in Retirement
Many retirees overpay tax on pensions because pension providers often apply an emergency tax code on lump sum withdrawals. If you have paid too much tax, you can claim a refund.
When Might You Be Owed a Tax Refund?
You took a large pension lump sum and were taxed too much.
You paid tax on savings interest despite being under the Personal Savings Allowance.
You had multiple pension incomes and were put on the wrong tax code.
How to Claim Your Tax Refund
1. Claiming Overpaid Tax on Pension Withdrawals
If you withdrew a lump sum and were overtaxed, claim a refund using:
P55 form if you took part of your pension and are still making withdrawals.
P50Z form if you have emptied your pension pot.
P53Z form if you took your entire pension as a lump sum but still have other taxable income.
2. Claiming Overpaid Tax on Savings Interest
If your bank deducted tax on savings, use the R40 form to reclaim it from HMRC.
3. Claiming a Refund on PAYE Tax
If you were wrongly taxed on employment or pension income, check your tax code and request a correction from HMRC.
4. Tax-Saving Strategies for Pensioners
Use ISAs for Tax-Free Withdrawals
Unlike pensions, withdrawals from ISAs are completely tax-free. If you need extra income in retirement, drawing from an ISA instead of a pension helps avoid higher tax rates.
Defer Your State Pension
If you delay taking your State Pension, your payments increase by 1 percent for every 9 weeks you delay. Over a year, this equates to a 5.8 percent increase in payments.
Gift Money to Reduce Inheritance Tax
If you are concerned about Inheritance Tax, you can give away £3,000 per year tax-free. Gifts made more than seven years before death are also exempt from Inheritance Tax.
Claim Pension Tax Relief if You Keep Working
If you continue working in retirement and contribute to a pension, you still receive 20-45 percent tax relief on contributions.
5. Key Tax Deadlines for Retirees in 2025-2026
Deadline | What It’s For |
5 April 2026 | End of the 2025-2026 tax year – last chance to use allowances |
31 January 2026 | Deadline to file Self Assessment tax return |
5 October 2025 | Deadline to register for Self Assessment if required |
31 July 2026 | Second payment on account for certain taxpayers |
Understanding tax in retirement is crucial to avoiding overpayments and maximizing income. By using available allowances, tax-free investments, and claiming tax refunds, retirees can keep more of their money and reduce their tax liabilities.
Summary of the Most Important Points on UK Income Tax for 2025-2026
Income tax bands remain unchanged, with a personal allowance of £12,570, basic rate at 20 percent, higher rate at 40 percent, and additional rate at 45 percent for earnings above £125,140.
High earners above £100,000 lose their personal allowance, creating an effective 60 percent tax rate on income between £100,000 and £125,140.
Self-employed individuals must file a Self Assessment tax return, paying 9 percent Class 4 NICs on profits between £12,570 and £50,270 and 2 percent above £50,270.
Tax-free allowances include £1,000 trading and property income allowances, £500 dividend allowance, and £1,000 personal savings allowance for basic rate taxpayers.
Buy-to-let landlords pay income tax on rental profits and Capital Gains Tax (CGT) of 18 percent (basic rate) or 24 percent (higher rate) when selling a property.
Capital Gains Tax-free allowance has been reduced to £3,000, with a higher tax rate of 20 percent for stocks and 24 percent for property sales.
Inheritance Tax (IHT) applies at 40 percent on estates over £325,000, but married couples can pass on £1 million tax-free if they leave their home to direct descendants.
Pension withdrawals over the 25 percent tax-free limit are taxed as income, so careful planning is needed to avoid higher tax rates in retirement.
Taxpayers who overpay tax on pensions, savings, or through PAYE can claim refunds via HMRC using forms P55, P50Z, P53Z, or R40.
Smart tax-saving strategies include using ISAs for tax-free investments, making pension contributions to reduce taxable income, and gifting money to reduce Inheritance Tax liabilities.
FAQs
Q1. Can you change your tax code if you think it’s incorrect?
A. Yes, you can contact HMRC to correct your tax code if you believe you are being taxed incorrectly, and you can check your tax code through your payslip or the HMRC online portal.
Q2. How does emergency tax work, and how can you reclaim overpaid tax?
A. Emergency tax is applied when HMRC does not have your correct income details, and you can reclaim overpaid tax by submitting a P800 form or a Self Assessment tax return.
Q3. What is the difference between tax relief and tax allowance?
A. A tax allowance reduces the amount of income subject to tax, whereas tax relief reduces the actual amount of tax owed, such as pension contributions or charitable donations under Gift Aid.
Q4. How do tax brackets apply if you have multiple sources of income?
A. All taxable income from various sources is combined, and your total income determines which tax bracket applies, meaning a second job or additional income may push you into a higher tax rate.
Q5. Do you need to pay tax on foreign income if you are a UK resident?
A. Yes, UK residents must declare and pay tax on worldwide income unless they qualify for exemptions under the non-domiciled status or a double taxation agreement.
Q6. How does the UK tax system treat cryptocurrency earnings?
A. Cryptocurrency gains are subject to Capital Gains Tax (CGT), and any crypto earnings from mining, staking, or trading may also be subject to Income Tax.
Q7. What happens if you do not file your Self Assessment tax return on time?
A. Late submissions result in a £100 fine, increasing with further delays, and additional penalties apply for unpaid tax after 30 days, six months, and twelve months.
Q8. How do you check how much income tax you have paid in the current year?
A. You can check your tax payments by logging into your HMRC online account, reviewing your PAYE coding notice, or using the HMRC app.
Q9. Are state benefits taxable, and which ones are tax-free?
A. Some benefits, like Jobseeker’s Allowance and State Pension, are taxable, while others, like Universal Credit and Personal Independence Payment (PIP), are tax-free.
Q10. If you work abroad but are still a UK tax resident, how is your income taxed?
A. As a UK tax resident, your global income is taxable, but if your foreign earnings are already taxed abroad, you may be able to claim relief under a double taxation agreement.
Q11. Can you reduce your tax bill if you work from home?
A. Yes, employees and self-employed individuals can claim work-from-home tax relief to cover expenses such as electricity, broadband, and office supplies.
Q12. What happens if you receive an unexpected tax bill from HMRC?
A. You should review the calculation, check if you can dispute it, and contact HMRC if you need a payment plan to spread the cost over time.
Q13. Do students need to pay income tax on part-time jobs?
A. Yes, if a student's earnings exceed £12,570 per year, they will be taxed under the standard PAYE system, but they may be eligible for a tax refund if they overpay.
Q14. How does tax work if you have both employment and self-employment income?
A. Your employment income is taxed through PAYE, while your self-employed income is taxed via Self Assessment, and the total determines whether you cross into a higher tax bracket.
Q15. What tax implications apply when receiving an inheritance in the UK?
A. Beneficiaries do not pay tax on inherited money directly, but estates over £325,000 may be subject to 40 percent Inheritance Tax (IHT).
Q16. Can you avoid higher tax rates by spreading income across multiple tax years?
A. Yes, deferring bonuses, pension withdrawals, or selling assets in a later tax year can help you stay in a lower tax bracket and reduce overall liability.
Q17. Are employer bonuses taxed differently from regular salary?
A. No, bonuses are subject to PAYE deductions, including Income Tax and National Insurance, which may push you into a higher tax bracket.
Q18. How do pension lump sums affect your income tax rate?
A. The first 25 percent of a pension lump sum is tax-free, but the rest is taxed as income, which could result in a higher tax rate if withdrawn in a single year.
Q19. Can you claim tax relief on professional memberships and work-related expenses?
A. Yes, if your employer does not reimburse the cost, you can claim tax relief on certain subscriptions, uniforms, and travel expenses through HMRC.
Q20. What is the difference between being a tax resident and a domiciled taxpayer in the UK?
A. Tax residency is based on the number of days spent in the UK, while domicile status determines whether you must pay tax on foreign earnings and inheritance.
Disclaimer:
The information provided in our articles is for general informational purposes only and is not intended as professional advice. While we strive to keep the information up-to-date and correct, My Tax Accountant makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information, products, services, or related graphics contained in the articles for any purpose. Any reliance you place on such information is therefore strictly at your own risk.
We encourage all readers to consult with a qualified professional before making any decisions based on the information provided. The tax and accounting rules in the UK are subject to change and can vary depending on individual circumstances. Therefore, My Tax Accountant cannot be held liable for any errors, omissions, or inaccuracies published. The firm is not responsible for any losses, injuries, or damages arising from the display or use of this information.
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