As we approach the end of the 2025/26 tax year, it is a good time to consider what lies ahead for the new financial year.
This can help you manage your strategic financial planning, making any appropriate adjustments to your current plan in line with upcoming tax changes.
Here, we’ve outlined the main tax changes you need to know about, and how you can adjust your financial plan accordingly.
Frozen Income Tax thresholds could tip you into a higher tax band
Although the actual rates of Income Tax aren’t going up, in the Autumn 2025 Budget, the chancellor announced that thresholds would be frozen for a further three years, until 6 April 2031.
The initial Income Tax freeze was introduced in April 2021/22, followed by further extensions in subsequent years. Effectively, we’ll have seen Income Tax thresholds frozen for 10 years, taking this latest into account (and assuming there are no further freezes to come).
For 2026/27, Income Tax thresholds remain at:
- Personal Allowance – £12,570 (0%)
- Basic rate – £12,571 to £50,270 (20%)
- Higher rate – £50,271 to £125,140 (40%)
- Additional rate – Over £125,140 (45%)
If your wages and income increase due to inflation but thresholds remain frozen, you could find yourself shifting into a higher tax band. This effectively means you pay tax on a larger portion of your income without seeing any increase in your purchasing power. This is known as “fiscal drag”.
Another key consideration with Income Tax thresholds is the “£100,000 tax trap”. Once your income exceeds £100,000, your Personal Allowance decreases by £1 for every £2 of extra income.
Essentially, this means you pay 60% tax on earnings between £100,000 and £125,140 (the point at which you lose your Personal Allowance entirely). This is because you’re not only paying tax on your earnings, but also on the proportion of Personal Allowance lost.
For example:
- If your pay increases from £100,000 to £110,000, you’ll pay 40% tax on the £10,000 increase.
- However, you’ll also pay 40% on the amount of Personal Allowance lost (in this case, £5,000).
- In total, this means you’re paying £6,000 (60%) tax on the extra £10,000.
Frozen Inheritance Tax thresholds mean you need to pay careful attention to your estate planning
As with Income Tax, the actual rate of Inheritance Tax (IHT) is not changing and is usually set at 40%. However, the government has extended the freeze on certain thresholds, a policy that has been in place since 2009 and will now last until April 2031.
According to The Telegraph, this will see the number of estates liable for IHT rise to 63,100 in 2029/30, more than double the number forecast to pay IHT in 2025/26.
Here’s what you need to know about IHT from April 2026:
- Your estate won’t be subject to IHT charges until it reaches the nil-rate band, which is set at £325,000 until 2031.
- An additional residence nil-rate band of up to £175,000 can be applied to your estate if you leave your main home to your direct descendants.
- Combining these two allowances means you can potentially leave a £500,000 estate free from IHT.
- You and your spouse can combine your allowances, meaning you can leave up to £1 million between you without paying IHT. Even so, as house prices increase and the threshold remains frozen, your family could nonetheless end up facing a higher IHT bill in the future.
Dividend Tax is increasing
From 6 April 2026, Dividend Tax is increasing by two percentage points for basic- and higher-rate taxpayers.
- Basic-rate taxpayers will pay 10.75%.
- Higher-rate taxpayers will pay 35.75%.
- The annual tax-free allowance will remain at £500, and additional-rate taxpayers won’t see any change.
If you have any investments in dividend-paying stocks (outside tax-efficient wrappers such as ISAs), you could be facing higher Dividend Tax payments.
These changes mean that your tax-efficient wrappers are more important than ever
If you think you’ll be affected by these tax changes, it makes sense to look at how you distribute your wealth, making sure you’re using tax-efficient wrappers where possible.
Saving into your pension
This can offer a tax-efficient solution, as your contributions will be eligible for tax relief at your marginal rate.
Plus, your investments can grow without being subject to Income Tax or Capital Gains Tax (CGT). Dividends inside pensions are not subject to Dividend Tax either.
Strategic planning
Effective planning with a professional financial planner could also help to reduce your income below some of the key thresholds outlined above, potentially shielding you from paying higher-rate tax and even restoring some or all your Personal Allowance.
Maximising your ISA allowances
ISAs also offer a tax-efficient way to manage your wealth in the light of tax changes. In 2026/27, you can save up to £20,000 across your Cash ISAs and Stocks and Shares ISAs.
Interest on cash savings is tax-free, and you won’t pay Dividend Tax or CGT on growth within a Stocks and Shares ISA either. There is also no Income Tax to pay when withdrawing funds from an ISA.
It’s worth noting that from April 2027, the rules around ISA savings are changing. Although the £20,000 allowance will remain in place, under-65s will be able to save a maximum of £12,000 in a Cash ISA, with the rest reserved for a Stocks and Shares ISA.
However, you can put as much of your allowance as you like into a Stocks and Shares ISA. These rules won’t apply if you’re over 65.
Use your combined allowances
In many cases, you and your spouse each have your own tax-free allowances, and you can use these together for maximum tax efficiency.
For example, making sure you both use your annual ISA allowances enables you to benefit from more tax-efficient savings and investments – as these allowances don’t roll forward, it’s important to maximise them.
This is also key for estate planning. You and your spouse each have a potential £500,000 IHT-free nil-rate band, which can be transferred when one of you dies, giving you £1 million between you.
Get in touch
While there are no major tax hikes coming up, frozen thresholds are likely to impact your wealth, and it’s important to understand how they might affect you so you can take any necessary action.
We’re here to help. Please get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning or tax planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.