Income Tax Planning Tips & Advice

The end of this tax year may feel many months away yet, but a little bit of tax planning can go a long way when it comes to mitigating your tax liabilities. With this in mind, over the next series of articles, we’re going to be highlighting some of the tax planning measures you might wish to consider over the coming months. 

As always, these articles provide an overview of the various measures available and no action should be taken without seeking professional advice.  

Tax bands and personal allowance summary

2025/26 income tax bands are:

• Basic rate: 20% on income up to £50,270
• Higher rate: 40% on income £50,271 to £125,140
• Additional rate: 45% on income over £125,140

The personal allowance remains at £12,570, once your income exceeds £100,000 this reduces at the rate of £1 for every £2 of income above £100,000, and phases out entirely beyond £125,140.

Tax planning tips:

• Review your income structure to ensure you’re not unnecessarily triggering higher tax bands. Can some income sources be shared with or transferred to your spouse?
• Ensure use of allowances and tax band thresholds through income planning or deferral, pension contributions or Gift Aid donations.

Understanding your marginal income tax rate

Understanding your marginal income tax rate is important when it comes to effective financial planning. Your marginal rate is the percentage of tax you pay on the next pound of income you earn, rather than an average of your total income tax. 

This rate depends on which tax band your income falls into, and it can vary as your earnings increase. For example, while you may pay 20% tax on income within the basic rate band, any income above the higher rate threshold is taxed at 40%, and income above the additional rate threshold at 45%. In certain ranges, such as between £100,000 and £125,140, the phased withdrawal of the personal allowance creates an effective marginal rate of 60%. 

Therefore, knowing your marginal rate can help you make decisions about timing income, pension contributions or charitable donations to reduce your tax liability.

Income thresholds 

There are several income thresholds that impact tax liability each year:

• Tax-free income up to £12,570: consider whether it is possible to pay income or salary to family members to use this allowance effectively.
• 20% basic rate between £12,571 and £50,270: combining this with the personal allowance gives an effective tax rate of 15%.
• 40% higher rate between £50,271 and £125,140. 
• 60% marginal rate between £100,001 and £125,140: reduce taxable income through pension contributions or Gift Aid donations.
• 45% additional rate applies from £125,141: no personal allowance remains at this level.

Further tax planning tips:

Consider deferring or accelerating income to avoid inefficient tax bands.

Freezing of allowances and fiscal drag

The personal allowance (£12,570) and basic rate band (£37,700) are frozen until 5 April 2028, increasing effective taxation over time through 'fiscal drag'. As incomes rise with inflation, more individuals will enter higher tax brackets.

Tax planning tips:

• Take proactive steps each year to use available allowances. For example, if you are married or in a civil partnership, you may be able to use the Marriage Allowance to transfer part of your unused personal allowance to your partner, or share income-producing assets to make better use of both partners’ allowances and lower tax bands. The Dividend Allowance (£500) and Savings Allowance (up to £1,000, depending on your tax band) can reduce tax on investment income, while Gift Aid donations can extend your basic rate band and increase higher rate tax relief. 
• Consider tax-efficient wrappers (e.g., ISAs, pensions) to minimize the impact of fiscal drag. Making use of your ISA allowance (£20,000 per year) and pension contributions can also be highly effective as they extend your basic rate band and may restore lost personal allowance if your income exceeds £100,000.

Dividend income and tax

Dividend income is taxed at the following rates for 2024/25 and 2025/26:

• 0% on the first £500 (Dividend Allowance)
• 8.75% for basic rate taxpayers
• 33.75% for higher rate taxpayers
• 39.35% for additional rate taxpayers

Dividends are taxed after other types of income and within the tax bands accordingly. Corporation tax on directors’ overdrawn loan accounts remains at 33.75%.

Tax planning tips:

• Spread dividend-generating assets across family members to use multiple £500 allowances.
• Time dividend payments to stay within lower tax bands and avoid the additional rate.

Tax on savings income

Savings income still counts toward basic or higher rate bands. A 0% starting rate of tax on up to £5,000 of savings income is available only if taxable non-savings income is below £5,000.

The Savings Allowance is:

• £1,000 for basic rate taxpayers
• £500 for higher rate taxpayers
• £0 for additional rate taxpayers

Tax planning tips:

• Structure savings accounts to ensure the most efficient use of Savings Allowances.
• Consider ISAs for tax-free savings, especially for additional rate taxpayers who receive no Savings Allowance.

Gift Aid for charity donations

Gift Aid allows individuals to give to charity and claim tax relief:

• Charities reclaim basic rate tax on donations.
• Higher and additional rate taxpayers claim extra relief on Self-Assessment (20% or 25%).

Gift Aid can be carried back to the previous tax year if elected on your tax return before the filing deadline of 31 January. Ensure sufficient tax was paid in the year for which relief is being claimed.

 Tax planning tips:

• Claim additional tax relief on donations through Gift Aid on your Self-Assessment.
• Use Gift Aid to reduce adjusted net income below critical thresholds.
• Consider carrying back donations to reduce the prior year's tax liability.

Gifts of assets to charity

Gifting qualifying assets (e.g. listed shares or UK land interests) provides income tax relief on the market value and avoids CGT. Relief cannot be carried back and no CGT loss is available if the asset has fallen in value. It may be more tax-efficient to sell a loss-making asset and donate the proceeds via Gift Aid to recognise the capital loss.

Tax planning tips:

• Donate appreciated qualifying assets to gain income tax relief and avoid CGT.
• Avoid gifting assets at a loss. Sell and donate cash to utilise CGT loss relief.

High Income Child Benefit Charge (HICBC)

HICBC begins when adjusted net income exceeds £60,000. The charge is 1% of the Child Benefit for every £200 of income above this threshold. Child Benefit is fully clawed back by the time your income reaches £80,000. Plans to base the charge on household income have been scrapped.

Tax planning tips:

• Use pension contributions or Gift Aid to bring income below £60,000 and avoid HICBC.
• Plan income distribution carefully if near the £60,000–£80,000 income band.

Pensions

Pension allowances for 2025/26 are:

• Annual Allowance: £60,000 (or 100% of earned income if lower).
• Tapered Annual Allowance: reduced to a minimum of £10,000 for adjusted income above £260,000
• Lump Sum Allowance: £268,275
• Lump Sum and Death Benefit Allowance: £1,073,100

Tax planning tips:

• Use pension contributions to reduce your adjusted net income and preserve personal allowance or avoid HICBC.
• Spread contributions over tax years to avoid the tapering threshold. 
• Unused Annual Allowance can be carried forward for three years, enabling higher contributions (subject to the earnings threshold). 

Tax efficient investments

ISA Limits for 2025/26 are:

• ISAs: £20,000
• Junior ISAs: £9,000
• Lifetime ISAs: £4,000 (excluding bonus)
• Child Trust Funds: £9,000

These investments offer tax-free growth and should be maximised annually where possible. 

 No changes were made to the EIS or SEIS regimes, which continue to offer valuable tax incentives for investment. (The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are UK government-backed initiatives designed to encourage investment in smaller, higher-risk companies by offering generous tax reliefs to investors.)

Tax planning tips:

• Maximise annual ISA allowances for tax-free growth.
• Consider EIS and SEIS investments for substantial income tax relief and capital gains deferral.

At Ritchie Phillips, we pride ourselves on providing clear, pragmatic advice to help businesses, individuals and families. If you’d like to discuss any of the above, please get in touch.