Introduction to UK Taxation
Navigating the UK tax system can seem daunting, but understanding its core components is essential
for individuals, businesses, and investors alike. The UK operates a progressive tax regime overseen
by HM Revenue and Customs (HMRC), where taxes fund public services such as healthcare, education,
and infrastructure.
For the 2025/26 tax year, running from 6 April 2025 to 5 April 2026, several key rates and thresholds
remain frozen or have seen minor adjustments due to recent budgetary decisions. This guide covers
income tax, National Insurance, VAT, corporation tax, capital gains tax, and inheritance tax, providing a
clear overview to help with compliance and planning.
Whether you’re an employee, self-employed, or running a business, staying informed on these elements
can optimise your financial position.
Income Tax Essentials
Income tax is levied on earnings from employment, self-employment, pensions, savings, and investments.
It’s calculated based on your total taxable income after deductions and allowances.
Rates and Bands for 2025/26
For residents in England, Wales, and Northern Ireland, the income tax bands are as follows:
- 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
Scotland has its own rates, starting with a 19% starter rate up to £2,827, progressing to a 48% top rate
over £125,140. These bands apply after the personal allowance is deducted. Savings and dividend income
have specific allowances: a £1,000 personal savings allowance for basic-rate taxpayers (reducing to £500
for higher-rate) and a £500 dividend allowance.
Personal Allowances and Reliefs
The standard personal allowance remains at £12,570, meaning no tax is due on income up to this amount.
However, if your income exceeds £100,000, the allowance tapers by £1 for every £2 over this threshold,
disappearing entirely at £125,140. Additional reliefs include the marriage allowance for couples and blind
person’s allowance. For those with fluctuating income, options like reducing payments on account can
ease cash flow.
National Insurance Contributions
National Insurance (NI) funds state benefits like the State Pension and NHS. Contributions vary by
employment status, with recent changes impacting employers significantly.
Employee and Employer NI Rates
Employees pay Class 1 NI at 8% on earnings between £12,570 and £50,270, dropping to 2% above
£50,270. Employers pay 15% on earnings above the secondary threshold, which has been reduced to
£5,000 annually from April 2025. This increase from 13.8% and threshold cut aims to raise revenue but
may affect business costs. The Employment Allowance has risen to £10,500, allowing eligible small
businesses to offset their NI liability.
Self-Employed NI
Self-employed individuals pay Class 2 NI at a flat £3.45 per week if profits exceed £6,725, and Class 4
at 6% on profits between £12,570 and £50,270, plus 2% above. These contributions build entitlement to
benefits, but voluntary payments can top up gaps for State Pension qualification.
Value Added Tax (VAT)
VAT is a consumption tax added to most goods and services, with businesses acting as collectors for
HMRC.
Current VAT Rates
The standard rate is 20%, applying to items like electronics, restaurant meals, and professional services.
A reduced rate of 5% covers domestic energy, children’s car seats, and certain renovations. Zero-rated
items, such as most food, books, and children’s clothing, incur no VAT but allow input tax recovery.
Exempt supplies, including education (though private school fees now attract 20% from January 2025)
and financial services, do not charge VAT.
Registration and Compliance
Businesses must register for VAT if taxable turnover exceeds £90,000 in a 12-month period. Once
registered, quarterly returns are required, with options like the Flat Rate Scheme simplifying calculations
for smaller firms. Non-compliance can lead to penalties, so accurate record-keeping is crucial.
Corporation Tax for Businesses
Corporation tax applies to company profits, with rates depending on profit levels.
Rates and Thresholds
For 2025/26, companies with profits under £50,000 pay 19% (small profits rate). Profits over £250,000
attract the main rate of 25%. Between these, marginal relief tapers the effective rate up to 26.5%. These
rates remain unchanged from prior years, but associated companies share thresholds, potentially increasing
tax for groups.
Allowances and Deductions
Businesses can claim capital allowances on assets, R&D relief for innovation, and losses carried forward.
Planning around these can significantly reduce liabilities.
Capital Gains Tax (CGT)
CGT is charged on profits from selling assets like shares or property.
CGT Rates and Allowances
The annual exempt amount is £3,000 for 2025/26. Gains above this are taxed at 18% for basic-rate
taxpayers and 24% for higher/additional-rate payers, now aligned for residential property and other assets
from April 2025.
Carried interest gains face 32%. Business Asset Disposal Relief offers a 10% rate on up to £1 million
lifetime gains for qualifying disposals.
Reporting Requirements
Property disposals must be reported within 60 days, with tax paid promptly. Losses can offset gains, aiding
tax efficiency.
Inheritance Tax (IHT)
IHT applies to estates upon death, but planning can mitigate its impact.
Thresholds and Rates
The nil-rate band is frozen at £325,000 until 2031, with an additional residence nil-rate band of £175,000 if
the home passes to direct descendants. Combined, couples can pass £1 million tax-free. Above these, the
rate is 40%, reducible to 36% if 10% of the estate goes to charity.
Exemptions and Gifting
Spousal transfers are exempt, and lifetime gifts can reduce IHT if made seven years before death. Trusts
and pensions (though changes from 2027 include pensions in estates) offer further strategies.
Other UK Taxes and Tax Planning Tips
Beyond core taxes, consider stamp duty land tax on property purchases, council tax, and excise duties. For
expats, residency rules affect taxation. To optimise, utilise ISAs for tax-free savings, pension contributions for
relief, and enterprise schemes like EIS for CGT deferral.
Seek professional advice for complex scenarios, especially with Making Tax Digital expanding to income tax
from April 2026.
Conclusion
The UK tax landscape for 2025/26 emphasises stability in many rates while introducing tweaks like NI
changes to balance fiscal needs. By understanding these elements, you can better manage obligations and
explore reliefs.
Regular reviews and compliance ensure you avoid penalties and maximise allowances, supporting long-term
financial health. For personalised guidance, consult a tax adviser or visit GOV.UK for official resources.