Optimising Tax Allowances In Self-Assessment For Higher-Rate Taxpayers 2025-26
- Adil Akhtar
- 5 days ago
- 12 min read
Updated: 2 days ago
The Audio Summary of the Key Points of the Article:
Maximising Your Tax Allowances as a Higher-Rate Taxpayer
What Are the Key Tax Allowances for 2025/26?
Let’s kick things off with the basics. As a higher-rate taxpayer in the UK for the 2025/26 tax year, you’re earning between £50,271 and £125,140 if you live in England, Wales, or Northern Ireland (Scotland has different bands, which we’ll cover later). Your goal is to make the most of every tax allowance available to reduce your tax bill when filing your self-assessment. The good news? There are several allowances you can leverage, but you’ll need to be proactive to claim them properly.
The Personal Allowance is your starting point. For 2025/26, it’s set at £12,570, meaning you pay no income tax on this amount of your earnings. But here’s the catch: if your income exceeds £100,000, this allowance shrinks by £1 for every £2 you earn above that threshold. Earn £125,140 or more? Your Personal Allowance vanishes completely. This tapering effect can sting, so understanding how to offset it is crucial.
Table 1: Income Tax Bands and Rates for England, Wales, and Northern Ireland (2025/26)
Income Range | Tax Rate | Notes |
Up to £12,570 | 0% | Personal Allowance (reduces above £100,000) |
£12,571 - £50,270 | 20% | Basic Rate |
£50,271 - £125,140 | 40% | Higher Rate |
Over £125,140 | 45% | Additional Rate (no Personal Allowance) |
Source: www.gov.uk/income-tax-rates
Now, if you’re in Scotland, the tax bands differ significantly. You face six bands, with the higher rate (42%) kicking in at £43,663, and even a 45% advanced rate from £75,001. This means Scottish taxpayers need to be extra vigilant about allowances to avoid overpaying.
Can the Marriage Allowance Save You Money?
Let’s talk about a lesser-known gem: the Marriage Allowance. If you’re married or in a civil partnership, and your spouse or partner earns less than £12,570 (the Personal Allowance threshold), they can transfer £1,260 of their unused allowance to you. This reduces your taxable income, saving you up to £252 in tax at the 40% higher rate. But be careful! This only works if you’re a basic-rate or higher-rate taxpayer, not an additional-rate taxpayer (over £125,140). For older couples, where one partner was born before 6 April 1935, the Married Couple’s Allowance offers even more savings—up to £1,108 off your tax bill for 2025/26.
Imagine this: Priya, a higher-rate taxpayer earning £60,000, is married to Sanjay, who earns £10,000 as a part-time freelancer. By transferring £1,260 of Sanjay’s Personal Allowance, Priya reduces her taxable income, saving £504 (£1,260 × 40%). They apply through www.gov.uk/apply-marriage-allowance, and it’s a quick win for their household.
How Does the Personal Savings Allowance Work for You?
Now, let’s dive into savings. As a higher-rate taxpayer, you get a Personal Savings Allowance (PSA) of £500. This means you can earn up to £500 in savings interest tax-free. Anything above that is taxed at your income tax rate (40% for you). Since April 2016, banks and building societies pay interest without deducting tax, so you’ll need to report any excess interest via self-assessment.
Here’s a practical tip: if you’re close to the £500 limit, consider moving excess savings into a Cash ISA, where interest is tax-free up to £20,000 per year. For example, Ewan, a higher-rate taxpayer, earns £600 in savings interest. He pays 40% tax on £100 (£600 - £500), which is £40. By shifting his savings to an ISA, he could avoid this tax entirely.
Table 2: Personal Savings Allowance by Tax Band (2025/26)
Tax Band | PSA Amount | Tax on Excess Interest |
Basic Rate (20%) | £1,000 | 20% |
Higher Rate (40%) | £500 | 40% |
Additional Rate (45%) | £0 | 45% |
Why Are Pension Contributions a Game-Changer?
Pension contributions are your secret weapon. Higher-rate taxpayers can claim 40% tax relief on pension contributions, up to an annual allowance of £60,000 (including employer contributions and basic-rate relief). Your pension provider automatically claims 20% relief, but you must claim the additional 20% through self-assessment.
Let’s break it down with an example. Suppose Aisha, a business owner earning £80,000, contributes £10,000 to her pension. Her provider claims £2,500 (20%) from HMRC, making her contribution worth £12,500. Aisha then claims an extra 20% (£2,500) via self-assessment, reducing her tax bill. This not only boosts her pension but also lowers her taxable income, potentially preserving more of her Personal Allowance if she’s near the £100,000 threshold.
Be careful, though! If your adjusted net income (including pension contributions) exceeds £260,000 and your threshold income is over £200,000, your annual allowance may taper to as low as £10,000. Always check your limits using HMRC’s pension calculator at www.gov.uk/tax-on-your-private-pension.
What About Dividend Income?
If you’re a business owner or investor, dividends are likely part of your income mix. The Dividend Allowance for 2025/26 is £500, meaning you pay no tax on the first £500 of dividends. Beyond that, higher-rate taxpayers pay 32.5% on dividends. Unlike salary, dividends don’t attract National Insurance, making them tax-efficient for company directors.
Consider this: Idris, a company director, pays himself a £12,570 salary (using his Personal Allowance) and £40,000 in dividends. After the £500 allowance, he pays 32.5% tax on £39,500, which is £12,837.50. By keeping his salary low and using dividends, he avoids NICs, saving thousands compared to a full salary.
Advanced Strategies and Self-Assessment Tips for Higher-Rate Taxpayers
How Can You Leverage Lesser-Known Tax Reliefs?
Now, let’s get into the nitty-gritty of some under-the-radar reliefs that can seriously cut your tax bill as a higher-rate taxpayer. Beyond the standard allowances, there are specific reliefs you might be overlooking, especially if you’re a business owner or have diverse income sources. These can be claimed through your self-assessment, but they require careful planning and documentation.
One gem is Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief. If you’re selling all or part of your business, or shares in a trading company where you’re a director or employee with at least 5% ownership, you could pay just 10% Capital Gains Tax (CGT) on the first £1 million of gains (lifetime limit). For higher-rate taxpayers, this is a massive saving compared to the standard 20% CGT rate on business assets. For example, Sian, a company director, sells her 10% stake in her tech startup for £800,000, with a gain of £600,000. Using BADR, she pays 10% (£60,000) instead of 20% (£120,000), saving £60,000. You’ll need to report this via self-assessment and meet strict criteria, so check eligibility at www.gov.uk/business-asset-disposal-relief.
Another relief to consider is Gift Aid. If you donate to charity, you can claim higher-rate tax relief on your contributions. The charity claims 20% basic-rate relief, and you can claim an additional 20% through self-assessment. Say you donate £5,000; the charity gets £6,250 (after 20% relief), and you can claim back £1,250 (20% of £6,250), reducing your tax bill. Just ensure you keep records of your donations.
How Do You Handle Mixed Income Sources?
So, the question is: what happens if you’re juggling income from employment, self-employment, and investments? Higher-rate taxpayers often face this scenario, and it can complicate your self-assessment. The key is to optimise each income stream to maximise allowances and minimise tax.
Let’s look at a case study. Meet Tariq, a higher-rate taxpayer with £40,000 from his day job, £20,000 from freelance consulting, and £10,000 in dividends from his side business. His total income is £70,000, well into the higher-rate band. Here’s how he optimises:
● Salary: His £40,000 salary uses up his Personal Allowance (£12,570) and part of the basic-rate band. He pays 20% on £27,430 (£5,486 tax).
● Self-Employment: His £20,000 freelance income is taxed at 40% after expenses (say, £5,000 for travel and equipment). He claims these expenses via self-assessment, reducing taxable income to £15,000, on which he pays £6,000 tax.
● Dividends: He uses his £500 Dividend Allowance, so £9,500 is taxed at 32.5% (£3,087.50).
Tariq also contributes £5,000 to his pension, claiming 40% relief (£2,000) via self-assessment, lowering his overall tax bill. By splitting income strategically and claiming expenses, he keeps his tax liability in check.
Table 3: Tax Rates for Mixed Income (2025/26)
Income Type | Tax Rate | Allowance | Notes |
Employment/Salary | 40% | Personal Allowance (£12,570) | Tapers above £100,000 |
Self-Employment | 40% | Deductible expenses | Report via self-assessment |
Dividends | 32.5% | Dividend Allowance (£500) | No NICs, reported via self-assessment |
What’s the Deal with National Insurance Contributions?
Now, it shouldn’t surprise you that National Insurance Contributions (NICs) can eat into your income, especially if you’re self-employed. For 2025/26, higher-rate taxpayers pay 8% Class 1 NICs on earnings between £12,570 and £50,270 (if employed) and 2% above £50,270. Self-employed taxpayers pay Class 2 NICs (£3.45 weekly if profits exceed £6,725) and Class 4 NICs (6% on profits between £12,570 and £50,270, 2% above).
Here’s a pro tip: if you’re a business owner, paying yourself a low salary (up to £12,570 to avoid NICs) and topping up with dividends can save thousands. For instance, Nia, a self-employed consultant earning £60,000, pays £2,351.40 in Class 4 NICs and £179.40 in Class 2 NICs. By incorporating and using dividends, she could reduce NICs significantly, though she’d need to weigh setup costs and compliance.
Step-by-Step Guide: Filing Your Self-Assessment for Maximum Allowances
Right, let’s get practical with a step-by-step guide to ensure you’re claiming every allowance and relief when filing your self-assessment for 2025/26. The deadline is 31 January 2027 for online returns (or 31 October 2026 for paper returns), but don’t leave it to the last minute!
Register for Self-Assessment: If you’re new to self-assessment (e.g., newly self-employed or earning untaxed income), register by 5 October 2025 at www.gov.uk/register-for-self-assessment.
Gather Records: Collect payslips, P60s, bank statements, expense receipts, pension contribution records, and donation records. Use accounting software like QuickBooks or spreadsheets for accuracy.
Identify Allowances and Reliefs: List all applicable allowances (e.g., Personal Allowance, Marriage Allowance, PSA) and reliefs (e.g., pension contributions, BADR, Gift Aid).
Calculate Taxable Income: Subtract allowances and deductible expenses from your total income. Use HMRC’s calculator at www.gov.uk/check-income-tax-current-year to estimate your liability.
Complete the Return: Log into your Government Gateway account, fill out the SA100 form, and add supplementary pages for self-employment, dividends, or capital gains. Claim additional reliefs (e.g., pension relief) in the “Additional Information” section.
Double-Check and Submit: Review for errors, especially on complex reliefs like BADR. Submit by 31 January 2027 to avoid a £100 penalty.
Pay Your Tax: Pay any tax owed by 31 January 2027. If you owe more than £1,000, consider payments on account (due 31 January and 31 July) to spread the cost.
For example, Rowan, a higher-rate taxpayer, forgot to claim £3,000 in pension relief last year, overpaying £1,200 in tax. By amending his return within 12 months, he reclaimed the overpayment via www.gov.uk/self-assessment-tax-returns/corrections.
Are You at Risk of Overpaying Tax?
Be careful! Higher-rate taxpayers often overpay due to errors in self-assessment or misunderstanding allowances. Common pitfalls include failing to claim pension relief, not deducting business expenses, or misreporting dividend income. HMRC’s emergency tax codes can also hit you if you start a new job or receive a one-off payment, temporarily taxing you at a higher rate.
To avoid this, check your tax code regularly via www.gov.uk/check-income-tax-current-year. If you’re overtaxed, you can claim a refund through self-assessment or by contacting HMRC directly. In 2024, HMRC processed over 1.2 million refunds, averaging £800 per taxpayer, so it’s worth staying vigilant.
Key Takeaways for Optimising Your Tax Allowances
What Are the Most Critical Points to Remember?
Right, let’s wrap this up with the essential points you need to carry forward as a higher-rate taxpayer in the UK for the 2025/26 tax year. These are the distilled insights from everything we’ve covered, designed to help you save money and file your self-assessment with confidence. Each point is a actionable nugget, so keep them in mind when planning your finances.
The Personal Allowance for 2025/26 is £12,570, but it tapers by £1 for every £2 of income above £100,000, disappearing entirely at £125,140.
The Marriage Allowance lets your lower-earning spouse transfer £1,260 of their Personal Allowance, saving you up to £504 in tax if you’re a higher-rate taxpayer.
Your Personal Savings Allowance is £500, meaning interest above this is taxed at 40%; use a Cash ISA to keep more interest tax-free.
Pension contributions offer 40% tax relief up to a £60,000 annual allowance, reducing your tax bill and boosting retirement savings.
The Dividend Allowance is £500, with dividends above this taxed at 32.5% for higher-rate taxpayers, making them a tax-efficient option for business owners.
Business Asset Disposal Relief can cut Capital Gains Tax to 10% on up to £1 million of business sale gains, but you must meet strict eligibility criteria.
Gift Aid donations allow you to claim an additional 20% tax relief on top of the charity’s 20%, lowering your tax liability.
For mixed income (salary, self-employment, dividends), strategically allocate allowances and claim expenses to minimize your tax and National Insurance Contributions.
File your self-assessment by 31 January 2027 (online) to avoid penalties, and use HMRC’s calculators to estimate your tax liability accurately.
Check your tax code and self-assessment regularly to avoid overpaying, as errors can lead to unnecessary tax bills or missed refunds.
FAQs
Q1: What is the higher-rate tax threshold for the 2025/26 tax year in the UK?
A1: The higher-rate tax threshold for 2025/26 in England, Wales, and Northern Ireland is £50,271, meaning income above this amount is taxed at 40% up to £125,140.
Q2: How does the Personal Allowance change for incomes over £100,000?
A2: For every £2 of income over £100,000, the Personal Allowance of £12,570 reduces by £1, disappearing entirely at £125,140.
Q3: Who is eligible for the Marriage Allowance?
A3: Couples where one partner earns below £12,570 and the other is a basic- or higher-rate taxpayer (but not additional-rate) can transfer £1,260 of the lower earner’s Personal Allowance.
Q4: What is the Personal Savings Allowance for higher-rate taxpayers?
A4: Higher-rate taxpayers receive a £500 Personal Savings Allowance, with interest above this taxed at 40%.
Q5: Can higher-rate taxpayers claim additional pension tax relief?
A5: Yes, they can claim an extra 20% tax relief on pension contributions through self-assessment, on top of the 20% automatically claimed by their pension provider.
Q6: What is the Dividend Allowance for 2025/26?
A6: The Dividend Allowance is £500, with dividends above this taxed at 32.5% for higher-rate taxpayers.
Q7: How does Business Asset Disposal Relief benefit higher-rate taxpayers?
A7: It reduces Capital Gains Tax to 10% on up to £1 million of qualifying business sale gains, compared to the standard 20% rate.
Q8: Can Gift Aid donations reduce a higher-rate taxpayer’s tax bill?
A8: Yes, higher-rate taxpayers can claim an additional 20% tax relief on donations, on top of the 20% claimed by the charity.
Q9: What are the National Insurance rates for self-employed higher-rate taxpayers?
A9: Self-employed individuals pay Class 2 NICs (£3.45 weekly if profits exceed £6,725) and Class 4 NICs (6% on profits between £12,570 and £50,270, 2% above).
Q10: What is the deadline for registering for self-assessment?
A10: New self-assessment taxpayers must register by 5 October following the tax year they need to file for.
Q11: Can higher-rate taxpayers claim tax relief on business expenses?
A11: Yes, self-employed higher-rate taxpayers can deduct allowable business expenses, reducing their taxable income.
Q12: How can someone check if they’ve overpaid tax?
A12: They can review their tax code or self-assessment return and use HMRC’s online calculator to estimate their tax liability.
Q13: What happens if a self-assessment return is filed late?
A13: A £100 penalty is applied for returns filed after 31 January (online) or 31 October (paper), with further penalties for extended delays.
Q14: Can higher-rate taxpayers use ISAs to reduce tax on savings?
A14: Yes, a Cash ISA allows up to £20,000 of tax-free savings interest annually, avoiding the 40% tax on excess interest.
Q15: How does tapering of the pension annual allowance work?
A15: For those with adjusted net income over £260,000 and threshold income over £200,000, the £60,000 pension allowance reduces by £1 for every £2 above £260,000, down to £10,000.
Q16: What is the difference between tax bands in Scotland and England?
A16: Scotland has six tax bands, with the higher rate (42%) starting at £43,663, compared to England’s 40% rate starting at £50,271.
Q17: Can higher-rate taxpayers claim tax relief for professional subscriptions?
A17: Yes, if the subscription is required for their job or profession, it can be claimed as an allowable expense via self-assessment.
Q18: How do payments on account work for self-assessment?
A18: If tax owed exceeds £1,000, taxpayers may need to make advance payments (31 January and 31 July) based on the previous year’s liability.
Q19: What records should higher-rate taxpayers keep for self-assessment?
A19: They should keep payslips, P60s, bank statements, expense receipts, pension contribution records, and donation records for at least 22 months after the tax year.
Q20: Can a higher-rate taxpayer amend their self-assessment return?
A20: Yes, they can amend their return within 12 months of the filing deadline to correct errors or claim missed reliefs.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 18 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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