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For anyone living and working in the UK, understanding how income tax bands work is essential, so you know exactly where you stand when it comes to paying what you owe.
Whether you’re a salaried employee, a self-employed professional, or a business owner managing payroll, we often get questions from clients about what they can expect to pay and how they can plan accordingly – it’s usually the reason why they come to us in the first place.
The UK tax bands for the 2025/26 tax year have changed, but the exact amount you pay will be different for every person.
When you work with Gorilla Accounting, your dedicated expert accountant will explain how the tax band brackets apply to your circumstances and offer insights into how to manage your finances more efficiently, whether you’re planning to form a company or you’ve been self-employed for years and already familiar with submitting your self-assessments.
Tax Bands & The Future
A recent forecast by the Office of Budget Responsibility (OBR) alongside the Spring Statement has predicted that more than 8.3 million people will find themselves paying a higher income tax rate by 2033 due to fiscal drag and long-term freezing on tax thresholds.
The projection is that over 8 million people would be pulled into the tax system or pushed into higher tax bands by 2029-30 because of earnings rising while tax thresholds remain fixed.
Rishi Sunak introduced threshold freezes in 2021 during his time as chancellor. They were intended to restore public finances post-pandemic.
However, fiscal drag occurs when tax bands do not rise in line with inflation or wages. It can go unnoticed by many workers, who only feel the impact once larger portions of their income are taxed at higher rates.
Since the introduction of the threshold freeze, the policy has remained in place despite record wage growth and inflation.
If tax bands kept pace with inflation, the number of income taxpayers would be 37 million by 2029-30, according to the OBR. Instead, it is forecast to hit 41.1 million.
Recently, the chancellor, Rachel Reeves, has committed to ending the freeze from 2028-29. Until then, the OBR forecasts that the UK’s overall tax burden will continue to rise, hitting its highest level since the Second World War, despite the Labour government’s pledge not to raise the main rates of income tax, national insurance or VAT for working people
But how does this affect you?
What Are Tax Bands?
Tax bands determine how much income tax you pay on your earnings. The system is progressive, meaning the more you earn, the higher the percentage of tax you pay on the portion of income that falls into each band.
The system applies to most types of income, including wages, profits from self-employment, pensions, and rental income. If you’re self-employed, working out which tax band you sit in now and in the future is vital to allow you to plan your tax efficiently.
We work with contractors, freelancers, landlords and locums who are all looking to manage their finances more efficiently. Knowing what tax band your earnings sit you in is the place to start.
2025/26 UK Income Tax Bands
Here are the tax bands and rates for non-savings income, for the 2025/26 tax year:
- Personal Allowance: Up to £12,570 – 0% (you pay no income tax on this portion)
- Basic Rate: £12,571 to £50,270 – 20%
- Higher Rate: £50,271 to £125,140 – 40%
- Additional Rate: Over £125,140 – 45%
The Personal Allowance is gradually withdrawn for individuals earning over £100,000. For every £2 you earn above £100,000, you lose £1 of your allowance. This means that once you reach £125,140, your Personal Allowance is entirely removed.
Dividend and Savings Income
Different rates apply for dividend income and savings income:
Dividend Tax Rates:
- Basic Rate Band: 8.75%
- Higher Rate Band: 33.75%
- Additional Rate Band: 39.35%
Everyone also gets a £1,000 savings allowance (for basic rate taxpayers) and a £500 savings allowance (for higher rate taxpayers). Additional rate taxpayers do not get a savings allowance.
Dividend allowance has been cut in recent years and now stands at £500 for 2025/26.
Strategies to Optimise Tax
As expert tax accountants, our role isn’t just to help you stay compliant, but also to help you plan smartly. When you’re self-employed, it’s on you to ensure your tax is paid correctly and on time, and you manage your own finances correctly.
When working with our clients, we use different strategies to optimise tax.
1. We Make Sure to Use Your Personal Allowance
Ensure that you are making full use of their personal allowance.
2. Take Advantage of Salary and Dividends for Directors
If you run a limited company, combining a lower salary with dividends is often more tax-efficient than taking a high salary home, however is usually dependent on your individual circumstances which would be assessed by one of our expert accountants.
3. Make Pension Contributions
Making pension contributions not only helps you plan for retirement but can also reduce your taxable income and potentially bring you down a tax band.
4. Gift Aid and Charitable Donations
Charitable giving can increase your basic rate band and reduce the effective tax you pay, especially if you’re in the higher or additional rate brackets.
5. Utilise ISAs
Investing through Individual Savings Accounts (ISAs) allows your returns to grow tax-free and can be a great way to shelter savings from tax altogether.
Tax Bands for Employers
If you hire employees, understanding tax bands is critical for payroll planning and staff budgeting. Through PAYE, you’re responsible for deducting the right amount of tax and National Insurance from your employees’ salaries.
Planning Ahead with Gorilla Accounting
While the income tax thresholds have been frozen in recent years, inflation and wage growth mean more people are being pulled into higher tax bands. It’s incredibly important to review your tax planning constantly with an accountant that understands you and your business.
Tax can feel complex, especially when personal circumstances, business income, investments, and pensions are involved. But with the right advice and proactive planning, you can legally reduce your tax liability and keep more of what you earn.
Gorilla Accounting offers an all-inclusive, fixed-fee accounting package tailored for contractors and freelancers operating through a limited company. The package includes a dedicated accountant, unlimited support and advice, and access to FreeAgent bookkeeping software.
Clients benefit from a transparent monthly fee, a guaranteed same-day response, and comprehensive services designed to simplify financial management. This approach ensures that clients can focus on their work while Gorilla Accounting handles the complexities of accounting and compliance.
We help individuals and businesses navigate the UK tax system with clarity and confidence. Whether you need help filing your tax return, managing payroll, or planning a long-term tax strategy, our team is here to support you.
If you’re looking to start working with an accountant, you can contact us today on 03301079676 to speak to a member of our New Business Team, or enquire today via our website.
