Understanding UK Income Tax Rates for 2025

3 Feb

As we move through the 2025/26 tax year, it’s essential for individuals and business owners to understand UK income tax rates, how they apply to salaries, and how dividend income is taxed differently. Being clear on these can help you plan your cash flow, avoid surprises, and make informed decisions about salary versus dividends if you operate through a limited company.

Below is a straightforward guide with illustrative examples to help you navigate the current rates.

UK Income Tax Rates 2025/26

For England, Wales, and Northern Ireland, the income tax bands for 2025/26 are:

Personal Allowance: £12,570 (0% tax)
Basic Rate: 20% on income from £12,571 to £50,270
Higher Rate: 40% on income from £50,271 to £125,140
Additional Rate: 45% on income over £125,140

Note: Your Personal Allowance reduces by £1 for every £2 of income above £100,000, disappearing entirely at £125,140.

Dividend Tax Rates 2025/26

Dividends have separate tax rates and a £500 dividend allowance for 2025/26:

Dividend Allowance: First £500 of dividends tax-free.
Basic Rate: 8.75% on dividends within the basic rate band.
Higher Rate: 33.75% on dividends within the higher rate band.
Additional Rate: 39.35% on dividends within the additional rate band.

Illustrative Examples

Example 1: Salary Income

Anna earns £45,000 from her employment.

First £12,570: 0% tax (Personal Allowance)
£32,430 (£45,000 - £12,570): taxed at 20% = £6,486 income tax

Anna’s total income tax liability for the year on her salary will be £6,486, not including National Insurance.

Example 2: Salary in Higher Rate Band

James earns £70,000 from employment.

First £12,570: 0% tax
Next £37,700 (£50,270 - £12,570): 20% = £7,540
Remaining £19,730 (£70,000 - £50,270): 40% = £7,892

Total income tax: £7,540 + £7,892 = £15,432

Example 3: Dividend Income

Sarah, a director of her limited company, pays herself £12,570 salary and £30,000 in dividends.

Calculation:

Salary of £12,570 uses up the Personal Allowance (no tax).
First £500 of dividends: 0% (Dividend Allowance)
Remaining £29,500 of dividends falls within the basic rate band, taxed at 8.75%:
- £29,500 x 8.75% = £2,581.25

Sarah’s total tax on her £30,000 dividends will be £2,581.25.

Why It Matters

Understanding the interplay between salary and dividends can help you:

✅ Optimise your tax position if you run a limited company.
✅ Plan for cash flow and set aside tax efficiently.
✅ Avoid underpaying or overpaying HMRC.

Need Help with Your Tax Planning?

Tax can feel overwhelming, but it doesn’t have to be. As your trusted accountant, I help individuals and business owners understand the nuances of UK tax, align their remuneration strategies, and stay compliant while reducing tax liabilities where possible.

📞 Contact us today to review your income and dividends strategy for the current tax year, ensuring you stay ahead of HMRC deadlines and optimise your finances confidently.

Mehreen Farooq