Various income thresholds can have a great impact on a person’s tax position and take-home pay as well as their access to certain key benefits linked to their earnings. This means that it’s massively important to plan remuneration properly for both directors and employees on growing salaries.
Earning more money is a significant goal for most people, whether they are a business owner or employee. But there may be cases in which a pay rise can actually leave you worse off, such as some parents earning marginally over £100,000.
When this happens, other methods of remuneration might be a better option, including pension contributions or donations to reduce your adjusted net income so it falls back below key limits.
There is a lot more to it than the three main tax bands (basic, higher, additional). In this blog, we’ll break down each threshold and explain the tax changes for each.
Personal Allowance
£0-£12,570
In this band, there is no income tax or dividend tax payable. Everyone receives the first slice of income tax-free.
Here, it’s key to ensure that you utilise it for you, while considering your partner and other family members. For some, it’s common to take this as a salary, with the rest topped up with alternative solutions like dividends. It should be noted, however, that recent changes in tax rules mean that this isn’t always the best strategy.
Basic Rate Band
£12,571-£50,270
In the basic rate band, income tax is payable at a rate of 20%. For people in this band, dividend tax, currently at 8.75%, will rise to 10.75% from April 2026. National Insurance Contributions also apply to employment income in this band (the bands differ slightly for national insurance, but you will roughly pay employees national insurance at 8%). Giving an effective rate for employment tax at 28%.
Higher Rate Band Part 1: Excluding the amount above £100k
£50,271-£100,000
If your income sits in this band, income tax is at 40%. The effective rate rises to ~42% when NI is included on employment income. Dividend tax is currently at 33.75% but will rise to 35.75% from April 2026.
Child Benefit Starts to Taper
£60,000
For parents, this band is especially important as this is where the child benefit starts to taper. It is clawed back at 1% of child benefit per £200 of income above £60,000 and worth £1,355/yr for your first child and £897 for each additional child (based on 25/26 tax year).
Child Benefit Fully Withdrawn
£80,000
At an income of £80,000, high income child benefit charge equals 100% of child benefit received. There is no net benefit from claiming Child Benefit payments at this level.
£100k tax trap
£100,000
The £100k tax trap is a big one and one that individuals should definitely be aware of, especially if they are parents.
When you start to earn £100,000, three things begin to happen simultaneously:
- Personal allowance begins to taper.
- 30 hours-funded childcare is lost entirely.
- Tax-free childcare top-up (£2,000/child/year) is also lost.
Earning just £1 over the limit means that the changes to 30 free hours of childcare and tax-free top-up will apply right away. The impact that this can have is massive; an extra pound can potentially cost you tens of thousands of pounds.
It’s important to note that this limit is per parent, not per household. A couple each earning £99,000 (combined £198,000) both qualify. A single parent or main earner on £100,001 loses everything, even though their household income may be lower.
A £2,000 bonus taking a parent’s income to £102,000 could cost their family thousands of pounds in lost childcare support and higher tax combined.
Adjusted net income includes salary, dividends, rental income, interest, and benefits in kind, not just your basic pay. Bonuses and commission are common culprits that push people over unexpectedly.
Higher Rate Band Part 2: 60% Effective Tax Zone
£100,000-£125,140
Your personal allowance tapers at £1 for every £2 earned above £100,000, creating an effective income tax rate of 60% on earnings in this band before National Insurance.
Personal Allowance Fully Gone
£125,141+
In the additional rate band, income tax is paid at 45%, with dividend tax at 39.35% (there is no planned change in 2026).
Pension Taper – Threshold Income
£200,000
If your threshold income (this is your income less your personal pension contributions) exceeds £200,000 and your adjusted income exceeds £260,000, the annual pension allowance begins to reduce.
Pension Taper – Adjusted Income
£260,000
Your annual pension allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum allowance of £10,000. This only applies where threshold income also exceeds £200,000.
Reducing your Adjusted Net Income
There are steps you can take to reduce your Adjusted Net Income.
Most thresholds are tested against adjusted net income, including your total flexible income less personal pension contributions, Gift Aid donations, and certain other reliefs. Your gross salary alone may not tell the full picture.
So, if you are closing in on key limits (most notably the £100k threshold) consider your position in February and expects income and consider personal pension contributions and donations.
It is crucial to get advice that can guide you in the right direction and give you the right support for your circumstances. If you’re getting close to one of these limits and would like a better understanding of how you can approach this, we can help you plan your remuneration more effectively.
Notes:
- Dividend tax rates are increasing from April 2026: the basic rate is rising from 8.75% to 10.75%; the higher rate from 33.75 to 35.75%. If you draw dividends from a company, this year’s planning is particularly important.
- Scotland: Scottish taxpayers have different income tax rates and bands. Please speak to local advisors if this applies to you if this applies to you.
*Please note that this blog is for general guidance only and does not constitute personal tax advice.
Tax rules and rates can change. Individual circumstances vary. Please speak to a qualified accountant before taking any action.
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