The government has introduced several significant tax changes for the upcoming 2025/26 tax year, affecting both individuals and businesses. This leaflet outlines the most important updates, particularly for residents of England, Wales, and Northern Ireland.

Unfortunately, this marks another year of stealth tax increases, primarily through the freezing or reduction of tax-free allowances.

INCOME TAX AND NATIONAL INSURANCE RATES

• The personal allowance for income tax remains unchanged at £12,570 per year, meaning the standard tax code stays at 1257L.
• Income between £12,571 and £50,270 – 20% tax
• Income between £50,271 and £125,140 – 40% tax
• Income above £125,140 – 45% tax
• The personal allowance reduces by £1 for every £2 of income above £100,000 and disappears entirely at £125,140 – resulting in an effective tax rate of up to 60% in this range.
• The National Insurance (NIC) threshold is also £12,570 per year. Employees pay no NIC up to this threshold. Employers begin paying NIC from £5000 per year.
• Employee NIC rate reduced to 8%
• Employer NIC rate increased to 15%
• Employment Allowance rises to £10,500 per year.

ISA ALLOWANCE

No change – the annual ISA contribution limit remains £20,000.

MARRIAGE ALLOWANCE

Still set at £1,260 per year – you can transfer unused portions of your personal allowance to your spouse.

SELF-EMPLOYED

• Class 2 National Insurance contribution is £3.50 per week, calculated on the annual tax return and collected with tax if net income exceeds £12,570.
• Class 4 NIC:
  • 6% on profits between £12,570 and £50,270
  • 2% on profits above £50,270
• Self-employed individuals with profits above £6,725 qualify for pension rights, even without paying Class 2 contributions.

VAT

• VAT registration threshold: £90,000
• VAT deregistration threshold: £88,000

LIMITED COMPANIES

• Corporation Tax:
  • 19% on profits up to £50,000
  • 25% on profits above £250,000
  • Marginal Relief: effective rate of approximately 26.5% between £50,000 and £250,000
• Dividend allowance: £500
• Dividend tax rates:
  • 8.75% – income up to £50,270
  • 33.75% – income up to £125,140
  • 39.35% – income above £125,140

WAGES AND EMPLOYMENT

• National Minimum Wage for those over 21: £12.21/hour
• Employment Allowance: £10,500 per year – applies only to employer NIC contributions

AUTOMATIC ENROLMENT

• Employers must enrol employees earning over £10,000 per year into a pension scheme (AE):
  • Contribution: 5% employee, 3% employer

CAPITAL GAINS TAX (CGT)

• Annual exempt amount: £3,000
• Rates:
  • 10% – total income up to £50,270
  • 20% – above this threshold
  • 18% / 28% – on property sales

OUR RECOMMENDATIONS

Limited Companies

The changes to NIC thresholds mean we no longer recommend automatic salary payments at £12,570 if the director is the sole employee – the company won’t qualify for Employment Allowance in this case.
This means salaries above £417 per month incur a 15% employer NIC liability.
Solution: Employ a second person (even temporarily) earning at least £417 per month to qualify for the allowance and avoid employer NIC contributions.

Self-Employment

Self-employment has become more advantageous – lower NIC rates (6%) and no need to pay dividends. Directors could sign a contract for services as self-employed instead of taking dividends.
We recommend avoiding dividend payments beyond the £500 allowance.

If you have any questions, please feel free to contact us via email.

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