Here in the UK, there are so many different rates of income tax that it really is taxing just keeping up with them. So what’s out there, and what do you need to be wary of?
Let’s start with the basics (and then get into the traps!).
The main tax rates
Everyone knows the headline rates: 20%, 40%, and 45%. Simple enough.
But those aren’t the only rates you might end up paying. Thanks to the way allowances taper and benefits are clawed back, there are hidden income tax traps that can push your effective rate much higher.
The dividend tax rates
If you’re a business owner taking dividends from your company, the rates are different. As of April 2026, tax on dividends is:
- 10.75% (basic rate)
- 35.75% (higher rate)
- 39.35% (additional rate)
These apply after your £500 tax-free dividend allowance.
Two tax traps to avoid
- The child benefit trap
This one catches a lot of people out.
If you’re receiving Child Benefit and either parent earns over £60,000, you start losing it. The benefit is gradually clawed back until it disappears entirely at £80,000. This creates an effective tax rate of around 55.75% on income in that band – higher than the headline 40% rate.
Interestingly (albeit frustrating!), the rules are based on individual income, not household income. So a couple where one partner earns £85,000 and the other earns nothing loses all their Child Benefit. But a couple where both partners earn £55,000 each – £110,000 combined – keeps the lot.
What can you do to avoid this?
- Keep your income below £60,000 if you’re close to the threshold
- Make pension contributions to reduce your adjusted net income
- Or simply opt out of receiving Child Benefit altogether (you can still register for National Insurance credits)
This is one of the most common income tax traps we see, and one of the easiest to plan around if you know it’s coming.
| Need help with child benefits or managing your income strategically?Get in touch, we’d love to help! |
- The personal allowance trap
This one’s even worse.
If your income is between £100,000 and £125,140, you lose £1 of your personal allowance for every £2 you earn above £100,000. By the time you hit £125,140, your personal allowance is gone completely.
The result? An effective tax rate of 60% on income in that band.
The taxman doesn’t explain it that way, of course. But that’s what it is.
What can you do to avoid this?
- Pension contributions are your friend here, they reduce your adjusted net income and can bring you back under the £100,000 threshold
- Salary sacrifice arrangements can help too
- If you’re a business owner, think about the timing and mix of salary and dividends
What can you receive tax-free?
It’s not all bad news. There are a few income tax traps you can avoid entirely by staying under certain thresholds!
If your total income is under the £12,570 personal allowance, you don’t pay income tax at all.
If your income is over this, then you need to be aware of the other tax-free thresholds:
Savings interest: The personal savings allowance gives you:
- £1,000 tax-free (basic rate taxpayers)
- £500 tax-free (higher rate (40%) taxpayers)
- £0 (additional rate (45%) taxpayers – sorry, no allowance for you)
Dividends: The first £500 is tax-free.
Rental income: The first £1,000 is tax-free under the property allowance.
Self-employed income: The first £1,000 is tax-free under the trading allowance.
Always seek advice
The UK tax system is full of quirks. Some of them work in your favour. Others, like the child benefit trap and the 60% band, can catch you off guard if you’re not paying attention.
The good news? With a bit of planning (and professional advice), most of these income tax traps are avoidable. You just need to know they’re there!
| That’s where we come in!We can help you minimise your tax to keep more of what you earn! Get in touch and we’ll make sure you’re not paying more than you need to. |
