Category Archives: Income Tax

A ‘60% Income Tax band’ can arises when an individual’s income exceeds £100,000 in a tax year. Once this threshold is crossed, the personal allowance is gradually withdrawn at a rate of £1 for every £2 of adjusted net income above £100,000. As a result, the £12,570 tax-free allowance is fully removed once income reaches £125,140.

Where annual income falls in the bracket between £100,000 and £125,140, the effective marginal tax rate increases to 60%, as the withdrawal of the personal allowance creates an additional layer of tax on income within this band.

Adjusted net income is used by HMRC to determine entitlement to certain reliefs and thresholds. Adjusted net income is broadly total taxable income before personal allowances, less certain reliefs such as pension contributions, Gift Aid donations, and trading losses.

This issue can create a significant planning opportunity for individuals whose income is close to or within this range to reduce their tax bill. In some cases, it may be possible to reduce taxable income below £100,000 to preserve the full personal allowance. Common planning approaches include increasing pension contributions, making charitable donations, or using available investment reliefs where appropriate.

For higher and additional rate taxpayers, charitable giving can also be used to reduce taxable income. Donations made in the current tax year may, in certain circumstances, be carried back to the previous tax year, provided the claim is made on or before the submission of the relevant self-assessment return (typically by 31 January 2027 for the 2025–26 tax year).

Carried interest is essentially a share of the profits from an investment fund that is paid to the fund managers. Unlike a fixed fee, its value depends directly on the fund's performance. This type of payment is considered carried interest if it is a profit-related return and meets a specific "no significant risk" condition.

A payment is considered a profit-related return if three conditions are met: (1) it only arises when the fund makes profits over the relevant period or investments; (2) the amount varies substantially in line with those profits rather than being fixed; and (3) it is based on the same profits used to determine returns for external investors, not a separate manager-only pool.

In addition to these three conditions, the arrangements must also pass a "no significant risk" test. This test assesses the likelihood that the payment will actually be made. Its purpose is to ensure that any fixed or guaranteed performance fees are appropriately charged to income tax, rather than being treated as carried interest.

For fund managers and their advisers, these criteria are central to determining tax treatment. Carried interest will generally be treated as such where it is dependent on fund profits, varies materially with those profits, and is calculated by reference to the same profit pool as external investors, provided the “no significant risk” condition is also met. Where these tests are satisfied, the return is brought within the carried interest tax rules, with corresponding implications for how and when it is taxed.

Understanding dividend tax is important for anyone who receives income from shares in a company. Dividends are taxed differently from salary, pensions and other forms of income, with their own allowances and tax rates.

For the 2026-27 tax year, individuals do not pay tax on dividend income that falls within their Personal Allowance of £12,570. In addition, there is a separate dividend allowance of £500. Dividend income received above these allowances is generally subject to tax.

The rate of tax payable depends on the individual's overall level of taxable income. For 2026-27, dividends falling within the basic rate band are taxed at 10.75%, those within the higher rate band at 35.75% and those within the additional rate band at 39.35%.

To determine the applicable rate, dividend income is added to other sources of taxable income. As a result, dividends can push an individual into a higher tax band, and different portions of the dividend income may be taxed at different rates.

Where total dividend income is £10,000 or less, an individual may ask HMRC to adjust their tax code so that any tax due is collected through their wages or pension. Alternatively, the income can be reported through a self-assessment tax return. There is normally no requirement to notify HMRC where dividend income is covered entirely by the dividend allowance.

Individuals who receive more than £10,000 in dividends must complete a self-assessment tax return. Those who do not normally file a return must register with HMRC by 5 October following the end of the tax year in which the dividend income was received.

Your tax code tells your employer or pension provider how much Income Tax to deduct from your pay. It is set by HMRC, and you may have a different code for each job or pension.

Most people with one job (or pension) use the code 1257L, which reflects the standard Personal Allowance of £12,570. The numbers show how much tax-free income you are entitled to, while the letters explain your circumstances.

Your tax code can change if your situation changes. Common reasons include starting a new job, receiving a pension or taxable benefits, claiming Marriage Allowance, receiving company benefits, or having unpaid tax from a previous year. HMRC may also update your code if your income details are corrected.

The letters in your code provide further detail. For example, L means you receive the standard Personal Allowance, M or N relate to Marriage Allowance, and BR means income is taxed at the basic rate. Codes ending in W1, M1 or X are emergency tax codes, used when HMRC does not yet have full information.

Emergency codes tax each pay period (such as weekly or monthly) in isolation, which can temporarily lead to overpayments or underpayments of tax. These issues are usually corrected once HMRC updates your records.

A "K" prefix indicates that taxable income or deductions exceed your Personal Allowance. In these cases, your employer will apply the adjustment but cannot take more than half of your pay.

If your tax code looks wrong, you should check your details with HMRC online or through the HMRC app. Once updated, any tax difference will normally be adjusted through your next payslip.

When you donate money to a charity or Community Amateur Sports Club (CASC) under Gift Aid, the organisation can claim an extra 25p from HMRC for every £1 you give. This increases the value of your donation at no extra cost to you.

If you pay higher or additional rate tax, you can also claim further tax relief on your donation. This is based on the difference between the basic rate and your highest rate of tax. The relief can be claimed through your self-assessment tax return or by asking HMRC to adjust your tax code.

For example, a £1,000 donation becomes £1,250 once Gift Aid is added. A higher rate taxpayer can then claim additional relief of £250 if they pay tax at 40%, or £312.50 if they pay tax at 45%.

You must have paid enough tax in the relevant tax year for your donations to qualify. In general, the total value of Gift Aid donations cannot exceed four times the amount of tax you have paid. If too much relief is claimed, you must notify the charity and repay the excess to HMRC.

You can also donate directly from your wages or pension through a payroll giving scheme if your employer operates one. This allows donations to be taken before Income Tax is deducted, giving you immediate tax relief at your highest rate.