What Are the England Tax Bands for 2025/26?
The tax year 2025/26 runs from 6 April 2025 to 5 April 2026. If you run a business in England, you need to know the income tax bands, National Insurance thresholds, and key allowances that apply. These figures determine how much tax you pay on your profits, salary, and dividends.
For the 2025/26 tax year, the personal allowance is £12,570 [1]. This means you can earn up to this amount before paying any income tax. The basic rate of 20% applies to taxable income between £12,571 and £50,270 [1]. The higher rate of 40% applies to income between £50,271 and £125,140 [1]. The additional rate of 45% applies to income over £125,140 [1].
These bands apply to England, Wales, and Northern Ireland. Scotland has its own income tax bands, which are different. If you live in Scotland, check the Scottish rates separately.
Personal Allowance: How It Works
The standard personal allowance of £12,570 is available to most people [1]. But it is not guaranteed for everyone. If your adjusted net income exceeds £100,000, your personal allowance reduces by £1 for every £2 of income above that threshold [1].
Once your income reaches £125,140, your personal allowance is zero [1]. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140. That is a significant tax trap for business owners who push their income into this bracket.
For example, a limited company director taking a salary of £12,570 and dividends of £90,000 has total income of £102,570. Their personal allowance reduces by £1,285 (half of the £2,570 above £100,000). They lose £1,285 of tax-free allowance, effectively paying 40% on that portion plus the lost allowance.
Income Tax Rates in Detail
Basic Rate (20%)
The basic rate band is £37,700 of taxable income above your personal allowance [1]. So if you earn £50,270 in total, you pay 20% on £37,700 of it. The first £12,570 is tax-free.
Higher Rate (40%)
Once your taxable income exceeds £50,270, the next portion up to £125,140 is taxed at 40% [1]. This is where most business owners with profitable companies or high freelance earnings sit.
Additional Rate (45%)
Income above £125,140 is taxed at 45% [1]. This rate applies to high earners, including directors of very profitable companies who take large dividends.
National Insurance Thresholds 2025/26
National Insurance is separate from income tax but equally important for business owners. The key thresholds for 2025/26 are:
- Primary threshold (employee NI): £12,570 per year. You start paying Class 1 NI at 8% on earnings above this, up to £50,270, then 2% above that.
- Secondary threshold (employer NI): £9,100 per year. Employers pay 13.8% on earnings above this.
- Class 2 NI (self-employed): £3.45 per week if profits exceed £6,725. This gives access to certain state benefits.
- Class 4 NI (self-employed): 6% on profits between £12,570 and £50,270, then 2% above £50,270.
If you are a limited company director, you can set your salary at £12,570 to match the personal allowance and primary NI threshold. This avoids employee NI while still building qualifying years for your state pension. However, employer NI at 13.8% kicks in above £9,100. Many directors use the Employment Allowance (up to £10,500) to offset this cost if they employ staff.
Dividend Tax Rates 2025/26
Dividends are a common way for limited company directors to extract profits. The dividend tax rates for 2025/26 are:
- Basic rate taxpayers: 8.75% on dividends above the £500 allowance.
- Higher rate taxpayers: 33.75% on dividends above the £500 allowance.
- Additional rate taxpayers: 39.35% on dividends above the £500 allowance.
The dividend allowance dropped to £500 from April 2024. This means every director now pays tax on dividends above that small amount. The allowance is not a tax-free band. It is a nil-rate band. Dividends within the allowance still count towards your basic rate band, potentially pushing you into higher rate tax.
For a director with a salary of £12,570 and dividends of £37,700 (total £50,270), the first £500 of dividends are tax-free. The remaining £37,200 are taxed at 8.75%, giving a tax bill of £3,255. That is efficient. But once total income exceeds £50,270, dividends are taxed at 33.75%.
Corporation Tax Rates 2025/26
If you run a limited company, corporation tax applies to your profits. The rates for 2025/26 are:
- Small profits rate: 19% on profits up to £50,000.
- Main rate: 25% on profits above £250,000.
- Marginal relief: Applies between £50,000 and £250,000. The effective rate gradually increases from 19% to 25%.
The £50,000 threshold is divided by the number of associated companies. If you have two companies, the threshold drops to £25,000 each. This catches out business owners who incorporate multiple entities without planning.
Capital Gains Tax 2025/26
Capital gains tax (CGT) rates changed significantly from 30 October 2024. For 2025/26:
- Basic rate (non-residential assets): 18%.
- Higher rate (non-residential assets): 24%.
- Residential property: 18% basic rate, 24% higher rate.
- Business Asset Disposal Relief (BADR): 14% for disposals from 6 April 2025, rising to 18% from 6 April 2026.
The BADR lifetime limit remains £1 million. Shares must have been held for at least two years. If you are planning to sell your company, the timing of the disposal matters. The rate jumps from 14% to 18% in April 2026.
How These Bands Affect Your Business
Understanding the England tax bands helps you plan your income extraction strategy. Here is how different business structures are affected:
Sole Traders
You pay income tax and Class 2 and Class 4 NI on your profits. If your profits are £60,000, you pay 20% on the first £37,700 above your personal allowance, then 40% on the remaining £9,730. Your total income tax is around £11,432. Plus Class 4 NI at 6% on profits between £12,570 and £50,270, and 2% above that.
Limited Company Directors
You can choose your salary and dividend mix. A salary of £12,570 avoids employee NI and uses your personal allowance. Dividends up to £37,700 are taxed at 8.75%. Total tax on £50,270 of income is around £3,255. Compare that to a sole trader paying £11,432 in income tax plus NI. The difference is significant.
But corporation tax at 19% or 25% applies to company profits first. You need to factor that in. The overall tax saving depends on how much profit you retain in the company versus extract.
Partnerships
Each partner pays income tax and NI on their share of profits. The bands work the same as for sole traders. Partnership structures can be tax-efficient if profits are split between partners in lower tax bands.
Making Tax Digital for Income Tax
From April 2026, Making Tax Digital (MTD) for Income Tax becomes mandatory for self-employed individuals and landlords with qualifying income over £50,000. From April 2027, it applies to those with income over £30,000. From April 2028, it applies to those with income over £20,000.
MTD requires you to keep digital records and submit quarterly updates to HMRC using compatible software. If you are a sole trader or landlord approaching these thresholds, now is the time to set up your bookkeeping software. Xero, QuickBooks, and FreeAgent all support MTD.
Practical Steps for Business Owners
Here is what you should do based on your situation:
- Check your total income. If it exceeds £100,000, plan to avoid the personal allowance taper. Consider pension contributions to reduce adjusted net income.
- Review your salary and dividend mix. For limited company directors, the £12,570 salary plus dividends to the basic rate band is usually optimal. But this changes if you have other income or if the Employment Allowance is available.
- Plan for dividend tax. With the £500 allowance, every dividend you take above that is taxed. Factor this into your cash flow planning.
- Consider pension contributions. Contributions reduce your adjusted net income, potentially keeping you below the £100,000 taper threshold or the higher rate band.
- Use the Annual Investment Allowance. The AIA is £1 million per year for most businesses. If you need equipment, buy it before your year-end to reduce taxable profits.
If your business structure is not optimised for these bands, it may be worth reviewing. Our services page covers how we help business owners with tax planning. For a deeper look at the fundamentals, see our fundamentals guide. And if you are considering incorporating, our incorporation page explains the process.
Common Questions About England Tax Bands
Business owners often ask how these bands interact with specific situations. Here are three common scenarios:
Scenario 1: A freelance consultant in Manchester earning £80,000. They are a sole trader. Their income tax is roughly £19,432 (20% on £37,700, 40% on £29,730). Plus Class 4 NI of around £3,044. Total tax: £22,476. If they incorporated and took a salary of £12,570 plus dividends of £67,430, the dividend tax would be around £22,758 (33.75% on £66,930 after the £500 allowance). Plus corporation tax on retained profits. The comparison depends on how much profit stays in the company.
Scenario 2: A husband-and-wife limited company running a Birmingham café. Profits are £80,000. If both take a salary of £12,570 and split the remaining £54,860 as dividends equally, each has total income of £39,930. Each pays dividend tax at 8.75% on £27,430 (after the £500 allowance). Total dividend tax: £4,800. That is far more efficient than one person taking all the income.
Scenario 3: A tech startup founder in Shoreditch with a £150,000 salary. Their personal allowance is zero. They pay 45% on income above £125,140. Their effective tax rate is around 47% including employee NI. Pension contributions would reduce their adjusted net income and restore some personal allowance.
Key Takeaways
The England tax bands for 2025/26 are stable but contain traps. The personal allowance taper above £100,000 is the most common one. The dividend allowance reduction to £500 affects every director. And the corporation tax marginal relief band requires careful profit planning.
If you are unsure how these bands apply to your business, speak to an accountant. Our contact page is the best place to start. We are ICAEW qualified and work with businesses across every sector.
For more detailed guidance on specific topics, see our limited company tax blog and sole trader blog.