For the 2025/26 tax year, the headline figures are unchanged. But "unchanged" is doing a lot of heavy lifting here: with thresholds frozen until at least April 2031, more small business owners than ever are being pulled into higher bands by ordinary wage growth. This guide sets out the current thresholds, explains how they work, and – most importantly – shows what you can do about them.
How income tax thresholds work
Income tax thresholds are the boundaries between different tax rates. Rather than taxing all your income at a single rate, the system taxes successive slices at progressively higher rates. Only the portion of income above each threshold is taxed at the higher rate – a concept sometimes called marginal taxation.
For example, if you earn £55,000, you don't pay 40% on all of it. You pay nothing on the first £12,570 (the Personal Allowance), then 20% on the next £37,700, and only 40% on the remaining £4,730 that falls into the higher rate band.
The types of income that count towards your thresholds include employment income, self-employment profits, rental income, most pension income, savings interest, and dividends. Savings and dividends have their own tax rates and allowances, but they still "stack" on top of your other income when determining which band they fall into.
England, Wales and Northern Ireland: 2025/26 thresholds
The rates and thresholds for 2025/26 are identical to the previous three tax years.
| Band | Taxable income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
The Personal Allowance of £12,570 has been fixed at this level since April 2022. The basic rate limit is £37,700, giving a higher rate threshold of £50,270 (Personal Allowance plus basic rate limit). The additional rate threshold was reduced from £150,000 to £125,140 in April 2023 and has remained there since.
Scotland: 2025/26 thresholds
If your main residence is in Scotland, you pay Scottish Income Tax on non-savings, non-dividend income. Scotland operates six tax bands compared with three in the rest of the UK, and both the thresholds and rates differ.
| Band | Taxable income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Starter | £12,571 – £15,397 | 19% |
| Basic | £15,398 – £27,491 | 20% |
| Intermediate | £27,492 – £43,662 | 21% |
| Higher | £43,663 – £75,000 | 42% |
| Advanced | £75,001 – £125,140 | 45% |
| Top | Over £125,140 | 48% |
The Starter and Basic rate band limits were increased for 2025/26 (by 22.6% and 6.6% respectively), raising the thresholds at which taxpayers begin paying the Basic and Intermediate rates. However, the Higher, Advanced and Top rate thresholds remain frozen.
Key differences from the rest of the UK. Scottish taxpayers earning up to about £30,300 pay slightly less income tax than they would elsewhere in the UK. Above that level, the higher rates and lower threshold for the 42% band (£43,663 versus £50,271) mean Scottish taxpayers generally pay more. If you run a business with staff in Scotland, make sure your payroll software recognises the S-prefix tax codes that HMRC assigns to Scottish taxpayers.
The Personal Allowance: tapering and the 60% trap
Everyone gets a Personal Allowance of £12,570, but it doesn't last forever. Once your adjusted net income exceeds £100,000, the allowance is withdrawn at a rate of £1 for every £2 of income above that threshold. By the time income reaches £125,140, the Personal Allowance is reduced to zero.
⚠️ Attention: The hidden 60% tax rate
This tapering creates an effective marginal tax rate of 60% on income between £100,000 and £125,140. For every additional £1 earned in this band, you pay 40p in income tax plus lose 50p of your Personal Allowance (which would otherwise have been tax-free at 40%), costing you a further 20p. This is one of the most commonly overlooked traps for successful small business owners and company directors drawing higher salaries.
How to protect your allowance
The taper is calculated on adjusted net income (ANI) – broadly, your total taxable income minus pension contributions and Gift Aid donations. This means you can bring your ANI back below £100,000 through legitimate planning.
Common strategies include making personal pension contributions (which receive tax relief and reduce ANI), using salary sacrifice arrangements with your employer or your own limited company, and increasing Gift Aid charitable donations. For a company director earning £110,000, a pension contribution of just £10,000 could restore the full Personal Allowance and save £2,514 in tax – on top of the tax relief on the pension contribution itself.
Other allowances worth noting
The Blind Person's Allowance (£3,130 for 2025/26) is added on top of the Personal Allowance and increases annually with inflation – one of the few personal tax thresholds that does.
The Marriage Allowance lets a spouse or civil partner who earns less than £12,570 transfer up to £1,260 of their unused Personal Allowance to their partner, provided the recipient is a basic rate taxpayer. The tax saving is modest (up to £252 a year) but it's free money that many couples overlook.
Savings and dividend allowances
These sit alongside – not outside – the main income tax bands.
Personal Savings Allowance. Basic rate taxpayers can earn up to £1,000 in savings interest tax-free; higher rate taxpayers get £500; additional rate taxpayers get nothing. The Starting Rate for Savings provides up to £5,000 of savings income taxed at 0%, but only if your non-savings income is below £17,570.
Dividend Allowance. The annual tax-free dividend allowance is £500 for 2025/26 – down from £1,000 in 2023/24 and £2,000 in 2022/23. This is a significant reduction for owner-managed businesses that rely on dividends as part of their extraction strategy. Dividends above the allowance are taxed at 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate).
For a small business owner drawing, say, £50,270 in salary and £20,000 in dividends, the dividends sit on top of the salary for banding purposes. The first £500 of dividends would be covered by the Dividend Allowance, but the remaining £19,500 would be taxed at the higher rate dividend rate of 33.75%.
The threshold freeze and fiscal drag
This is perhaps the most consequential tax policy affecting UK small businesses right now – and it operates almost invisibly.
What's been frozen
The Personal Allowance (£12,570), the basic rate limit (£37,700), and the higher rate threshold (£50,270) have been frozen since April 2022. Originally due to end in April 2026, the freeze was extended to April 2028 by the Conservative government and then again to April 2031 in the Autumn Budget 2025. The additional rate threshold of £125,140 is also frozen for this period.
The real-world impact
If these thresholds had risen with inflation since 2022, the Personal Allowance would be approximately £15,480 for 2025/26 – a difference of £2,910. That means anyone earning above £15,480 is paying at least £582 more in income tax this year than they would under indexed thresholds.
The cumulative effect is substantial. According to the OBR, the threshold freeze will bring an additional 5.2 million people into income tax and pull 4.8 million more into the higher rate band by 2030/31. In total, the policy is expected to raise an additional £55.5 billion in that year alone.
⚠️ Attention: Fiscal drag hits mid-earners hardest
If you're a sole trader, freelancer or contractor whose income has grown from £48,000 to £53,000 over the past few years through nothing more than inflationary pay rises, you've been pushed from the basic rate into the higher rate band – and you'll stay there. The same applies to employees whose bonuses or overtime push them over £50,270. Check your position each year; what was comfortably below a threshold in 2021 may now sit above it.
Planning around the higher rate threshold
For many small business owners, the £50,270 higher rate threshold is the critical number. Exceeding it doesn't just increase your marginal tax rate from 20% to 40% – it can also halve your Personal Savings Allowance and trigger the High Income Child Benefit Charge if you're near £60,000.
The Child Benefit connection
Since April 2024, the High Income Child Benefit Charge (HICBC) applies when the higher-earning partner in a household has adjusted net income above £60,000. The benefit is clawed back at a rate of 1% for every £200 above the threshold, and fully withdrawn at £80,000. This is calculated on individual income, not household income – a widely criticised feature that remains in place despite previous reform promises.
For a family receiving Child Benefit for two children (worth roughly £2,075 a year), an income of £70,000 means repaying 50% of the benefit through the tax charge. Pension contributions and salary sacrifice can reduce your ANI below £60,000 and eliminate the charge entirely.
Practical strategies
The most commonly used approaches to managing your position relative to key thresholds include pension contributions (personal or via salary sacrifice), Gift Aid donations, and – for company directors – adjusting the salary/dividend split. These are all legitimate and well-established.
Salary sacrifice for benefits such as pension contributions, electric vehicles, or cycle-to-work schemes reduces your gross pay for tax purposes, potentially keeping you below the higher rate threshold or the HICBC trigger. If your limited company is considering an electric car via salary sacrifice, the benefit-in-kind rate remains very low (3% for 2025/26), making it a tax-efficient option that simultaneously reduces your reported income.
Calculating your bill: worked examples
Employee on £30,000
| Amount | Tax | |
|---|---|---|
| Personal Allowance | £12,570 | £0 |
| Basic rate (£12,571–£30,000) | £17,430 | £3,486 |
| Total income tax | £3,486 |
Sole trader on £55,000
| Amount | Tax | |
|---|---|---|
| Personal Allowance | £12,570 | £0 |
| Basic rate (£12,571–£50,270) | £37,700 | £7,540 |
| Higher rate (£50,271–£55,000) | £4,730 | £1,892 |
| Total income tax | £9,432 |
Company director on £130,000
At this income level, the Personal Allowance is fully tapered away (income exceeds £125,140).
| Amount | Tax | |
|---|---|---|
| Basic rate (£0–£37,700) | £37,700 | £7,540 |
| Higher rate (£37,701–£125,140) | £87,440 | £34,976 |
| Additional rate (£125,141–£130,000) | £4,860 | £2,187 |
| Total income tax | £44,703 |
Note: National Insurance contributions are calculated separately – they have their own thresholds and rates.
PAYE tax codes and what to watch for
Your tax code tells your employer how much of your income is tax-free. The standard code for 2025/26 is 1257L, reflecting a Personal Allowance of £12,570. Scottish taxpayers receive codes prefixed with S (e.g. S1257L), and Welsh taxpayers with C.
Common codes to understand: BR (all income taxed at basic rate – often used for a second job); 0T (no Personal Allowance, used when HMRC hasn't received enough information); and K codes (where taxable benefits exceed the allowance, so extra tax is collected).
If your employee has been placed on a month-1 (or week-1) basis rather than the normal cumulative basis, the payroll calculates tax on each pay period in isolation rather than year-to-date. This often happens with emergency codes and can cause temporary over- or underpayments that even out when the correct code is applied cumulatively.
For business owners running payroll: check your employees' tax codes at the start of each tax year. HMRC issues updated codes in February/March, and applying the wrong code is one of the most common payroll errors.
Income tax vs National Insurance: don't confuse them
Income tax and National Insurance share some superficially similar thresholds (the Primary Threshold for employee NICs aligns with the Personal Allowance at £12,570), but they are entirely separate systems. They fund different things, charge at different rates, and are governed by different legislation.
The employee NIC rate of 8% applies on earnings between £12,570 and £50,270, with 2% above that. From April 2025, employer NICs increased to 15% with the secondary threshold dropping to £5,000 – a significant cost increase for businesses. Changes to NIC rates do not affect income tax thresholds, and vice versa.
Special cases that can push you over a threshold
A few situations catch small business owners off guard.
Bonuses and irregular pay. A year-end bonus can push an employee or director over the higher rate threshold for that tax year. PAYE should handle this automatically, but if you're near a threshold, consider whether the bonus could be replaced by a pension contribution.
Benefits in kind. Company cars, private medical insurance, and other benefits count as taxable income. A modest company car benefit of £5,000 could be enough to push someone earning £48,000 into the higher rate band.
Multiple income sources. If you have a PAYE job and self-employment income, or rental income alongside your salary, all sources are aggregated for threshold purposes. HMRC won't always pick this up through PAYE, so you may need to file a Self Assessment return.
Student loan repayments use their own thresholds (Plan 1: £24,990; Plan 2: £27,660; Plan 5: £25,000 for 2025/26) and are deducted alongside tax and NIC, further reducing take-home pay.
The threshold freeze: past, present and future
The timeline of the freeze tells a clear story of escalation. In 2021, the freeze was announced for four years (to 2025/26). In 2022, it was extended to 2027/28. In the Autumn Budget 2024, the government confirmed it would end at April 2028 – only to reverse that position in the Autumn Budget 2025, extending the freeze to April 2031.
For small business owners, the practical implication is straightforward: do not expect relief from these thresholds for at least another five tax years. If your profits or salary have been rising steadily, you will pay more tax each year even if rates stay the same.
Common mistakes to avoid
Assuming rUK bands apply if you're in Scotland. If you or any employee moved to Scotland, their income tax position changes. Payroll needs to use the correct S-prefix code, and Self Assessment returns must reflect Scottish rates. HMRC determines Scottish taxpayer status based on your main place of residence.
Ignoring adjusted net income near £100,000. Many business owners focus on the £50,270 threshold but forget about the Personal Allowance taper. If your income creeps above £100,000, the effective 60% rate on income up to £125,140 makes it one of the most expensive marginal tax bands in the system.
Confusing income tax thresholds with other thresholds. Capital Gains Tax has its own annual exempt amount (£3,000 for 2025/26). Inheritance Tax has its nil-rate band (£325,000). These are entirely separate from income tax, and changes to one system do not affect the other.
Tools and resources
For checking current thresholds and calculating your position, the most reliable sources are the GOV.UK income tax rates page (gov.uk/income-tax-rates) and HMRC's tax calculators. Third-party tools from reputable providers such as MoneySavingExpert, FreeAgent, and ICAEW also offer useful calculators.
When reviewing your own position, gather your P60 or payslip year-to-date figures, any P11D (benefits in kind), dividend vouchers, rental accounts, records of pension contributions, and Gift Aid declarations. These are the figures that determine which thresholds apply to you.
Frequently asked questions
Does pension income count towards the higher rate threshold?
Yes. State pension, workplace pension, and personal pension income are all taxable and count towards your total income for threshold purposes. The State Pension is not taxed at source, which catches some retirees by surprise.
Can salary sacrifice for an electric car help keep me below a threshold?
It can. Salary sacrifice reduces your gross pay, which lowers your income for tax band purposes, the HICBC calculation, and the Personal Allowance taper. The benefit-in-kind charge on electric cars remains very low.
Do ISA interest and gains affect my income tax threshold?
No. ISA income and gains are completely tax-free and do not count towards your taxable income or affect your threshold position.
What happens if I move from Scotland to England mid-year?
Your Scottish taxpayer status is determined by where your main place of residence is on the last day of the tax year (5 April). A mid-year move means you could be taxed under rUK rates for the entire year if England is your main residence on that date.
Where can I check the official UK income tax thresholds for the current year?
The most authoritative source is GOV.UK at gov.uk/income-tax-rates, which is updated at the start of each tax year. The House of Commons Library also publishes a comprehensive briefing on direct tax rates and allowances.