25/26 UK Personal Finance Comprehensive Guidance

1. Income Tax

Personal Allowance and Bands (England, Wales, N. Ireland): The tax-free Personal Allowance remains £12,570 (frozen until April 2028). Earnings above this are taxed in bands (Wales has not varied rates, so uses the same bands as England/N.I. at present):

• Basic Rate (20%) on income from £12,571 up to £50,270
• Higher Rate (40%) on income from £50,271 up to £125,140
• Additional Rate (45%) on income over £125,140 (note: personal allowance is tapered down for income > £100k and is zero by £125,140).

These thresholds are unchanged in cash terms (frozen) through 2025/26. If you have no other income, up to £5,000 of savings interest can also be tax-free under the 0% starting rate for savings (applicable if your non-savings income is below £12,570).

Scottish Income Tax: Scotland sets its own rates and bands for non-savings/non-dividend income. For 2025/26, the rates remain 19%, 20%, 21%, 42%, 45%, 48% in a tiered structure. Thresholds have been modestly uprated by ~3.5% for the lower bands (while higher bands are frozen). For example: 19% starter rate up to ~£15,397; 20% basic rate up to ~£27,491; 21% intermediate up to ~£43,662; 42% higher rate to £75,000; 45% “advanced” rate to £125,140; and 48% top rate above £125,140. The Personal Allowance (£12,570) still applies UK-wide, and Scottish taxpayers pay UK rates on savings and dividend income.

Dividend Income: The annual tax-free dividend allowance is £500 in 2025/26 (reduced from £2,000 in recent years). Dividends above this are taxed at special rates: 8.75% for basic-rate taxpayers, 33.75% for higher-rate, and 39.35% for additional-rate. (Dividend income is treated as the “top slice” of your income and still counts towards your tax bands.) Remember, dividends earned inside an ISA or pension remain tax-free.

Savings Interest: Most people have some savings interest tax-free thanks to the Personal Savings Allowance (PSA). Basic-rate taxpayers can earn up to £1,000 interest tax-free; higher-rate taxpayers up to £500; additional-rate taxpayers £0. This is on top of the £5,000 starting-rate band for savings (if applicable) and the Personal Allowance. In practice, if your total income (excluding interest) is under £50,270, you enjoy a £1,000 PSA. Interest above your allowances is taxed at your marginal rate (20%/40%/45%). Tip: Interest from ISAs or certain NS&I savings (see Section 4) is tax-free and doesn’t use up your PSA.

2. National Insurance (NI)

National Insurance contributions have seen major changes in April 2025. NI is a payroll tax that funds state benefits like the NHS and State Pension. It’s paid by employees, employers, and the self-employed, with different classes:

• Class 1 (Employees): In 2025/26, employees pay NI at 8% on earnings between the Primary Threshold and Upper Earnings Limit, and 2% on earnings above the UEL. (This is a notable cut from the previous 12% main rate – a policy change effective April 2025.) The Primary Threshold is £12,570/year (aligned to the personal allowance, about £242/week). The Upper Earnings Limit (UEL) stays at £50,270/year (about £967/week), matching the 40% tax threshold. Earnings below the Lower Earnings Limit (£125/week) don’t incur NI but still credit your NI record.
• Example: If you earn £40,000 salary, you pay 8% NI on roughly £27,430 (the portion between £12,570 and £40k) and 2% on any part above £50,270 (none in this case). The 8% rate leaves more in your paycheck compared to prior years.
• Class 1 (Employers): Employers pay NI on your salary above a Secondary Threshold, now dramatically lowered to £5,000/year from April 2025. The employer NI rate has increased to 15% (up from 13.8%) on earnings above that threshold. In effect, nearly all employee salaries now incur employer NI (since £5k is very low), but small businesses are cushioned by an expanded Employment Allowance of £10,500 (offset against their NI bill). Employers hiring under-21s, apprentices under 25, or armed forces veterans have 0% rate up to £50k (special thresholds).
• Class 2 (Self-Employed flat-rate): Big change: As of April 2024, self-employed people no longer have to pay Class 2 NI contributions at all if their profits are above the Small Profits Threshold (SPT) – these contributions are now treated as paid automatically. The SPT is ~£6,845 in 2025/26. If your profits are below ~£6.8k, you can choose to pay voluntary Class 2 (at £3.50 per week) to build up qualifying years for State Pension. In short, Class 2 NICs have effectively been scrapped for those earning above the SPT (no more ~£163 yearly charge), while still protecting your benefit entitlements.
• Class 4 (Self-Employed profits): Class 4 NIC is based on your annual self-employed profits. For 2025/26 the rates are 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. (These rates were cut from 9%/2% as part of the 2025 changes, reducing NI for sole traders.) If your profits fall below ~£12,570 (Lower Profits Limit), no Class 4 is due. Class 4 is calculated via Self Assessment each year.
• Other NI classes: Class 3 is voluntary NI for people who need to plug gaps in their NI record (e.g. if you have a missing year of contributions, you can pay Class 3, which costs ~£17.45 per week in 2025/26). This is often used to top up State Pension years. Class 1A/1B are paid by employers on certain benefits or as part of PAYE settlements at 15%.

Summary: The 2025/26 NI reforms shift more NI cost to employers and give workers and sole traders a tax break. Employees see a lower NI rate (8%), while employers face a higher rate (15%) on almost all earnings. Self-employed people benefit from not paying Class 2 and a lower Class 4 rate. These changes were introduced to ease cost-of-living pressures on individuals while broadening the base for employer contributions.

3. Pensions

Planning for retirement is crucial. Here’s what to know about pensions in 2025/26:

Annual Allowance (AA): You can contribute up to £60,000 per year into pensions with tax relief (up from £40k). This is the maximum tax-privileged amount – you can’t get tax relief on contributions above your earnings or above £60k (whichever is lower). High earners note: if your income exceeds certain thresholds, the AA tapers down. In 2025, if your “adjusted income” > £260,000, your AA reduces on a sliding scale (minimum £10,000 AA). Unused AA from the past 3 years can be carried forward to boost your limit. There’s also a Money Purchase Annual Allowance (MPAA) of £10,000 (raised from £4k) for those who have flexibly accessed a pension – meaning if you’ve started drawing from a defined contribution pot, future contributions are capped at £10k with tax relief.

Lifetime Allowance (LTA): Abolished. The Lifetime Allowance – which used to cap total pension savings (previously £1,073,100) – has effectively been removed from April 2024. The tax charge for exceeding the LTA was scrapped in 2023 and the LTA was officially abolished in Finance Act 2024. This means there’s no longer an upper limit on the amount of pension fund you can accumulate without punitive tax (though note: there’s a limit on tax-free lump sums – broadly, the 25% tax-free cash is now limited to a “Lump Sum Allowance” of £268,275 in most cases). In short, from 2025 you can build up your pension without a lifetime cap.

Tax Relief on Contributions: Contributions to pensions receive income tax relief at your marginal rate. If you pay into a workplace pension, your employee contributions are typically made gross (pre-tax) or via relief-at-source (20% top-up, with higher-rate relief claimable). Personal contributions to a SIPP or personal pension get 20% basic relief added automatically; higher/additional taxpayers claim extra via Self Assessment. Remember, total contributions (including employer’s) over the Annual Allowance may incur an AA charge effectively clawing back relief.

State Pension: The new State Pension (for those reaching State Pension Age post-2016) is £230.25 per week in 2025/26. You need 35 qualifying NI years to get the full amount, and at least 10 years to get anything. The State Pension increased by 4.1% in April 2025 (triple lock applied the September 2024 CPI figure). If you reached SPA before 2016, you’re on the old basic State Pension (£176.45 full rate, needing 30 years) plus any additional pension (SERPS/S2P). State Pension Age (SPA): Currently 66 for men and women. It will rise to 67 by 2028 (affecting those born April 1960 onwards). Plans to raise SPA to 68 are under review – as of 2025, no change has been set before the late 2030s. You can defer taking your State Pension for a higher weekly amount later (deferral yields ~5.8% for each year deferred). Also, Pension Credit is available to low-income pensioners to top up weekly income to a minimum (£227.10 single, £346.60 couple).

Minimum Pension Access Age: The earliest age to access private pensions (defined contribution pots) is currently 55, but this is scheduled to rise to 57 from April 2028. If you are currently in your early 50s, plan for that change. (Certain plans have protected ages, but these are exceptions.) Generally, from age 55 (57 from 2028) you can take pension benefits – e.g. 25% tax-free lump sum and the rest via annuity or drawdown, etc.

Auto-Enrolment: Employers must automatically enroll eligible workers into a pension. Eligibility: Age 22 up to State Pension Age, earning above £10,000 a year (or ~£833/month). The earnings trigger remains £10,000 (frozen since 2014). If you’re under 22 or earn below £10k, you can opt in (and if earning above ~£6,240, your employer must contribute). Minimum contributions are 8% of qualifying earnings – with at least 3% from the employer and the rest from the employee (including tax relief). “Qualifying earnings” are between £6,240 and £50,270 – effectively, you don’t contribute on the first £6,240 of earnings, and anything above £50,270 isn’t required for auto-enrolment contributions. (Employers can and many do contribute on full salary, but the law’s minimum focuses on that band.) Note: In 2023, a law was passed to extend auto-enrolment in the near future – it will lower the age to 18 (from 22) and remove the £6,240 lower earnings threshold, bringing more young and low-paid workers into pensions. As of 2025 this isn’t in force yet, but expect implementation by the mid-2020s.

Private Pensions & SIPPs: In addition to workplace pensions, individuals can contribute to personal pensions or SIPPs (Self-Invested Personal Pensions). These allow more control over investments. All such contributions count toward your Annual Allowance and get tax relief. For 2025/26, the maximum tax-relievable contribution is £60k or 100% of your earnings, whichever is lower (you can contribute up to £3,600 even with no earnings, due to a £2,880 +20% tax relief mechanism). SIPPs can be great for the self-employed or those wanting to consolidate old pensions – you pick investments (funds, stocks, etc.) and benefit from growth free of income tax or capital gains tax inside the pension. Be mindful that money is locked in until 55 (57 from 2028).

Pension Tax Relief Limits: The government provides tax relief upfront (20% automatically, more via self-assessment if higher rate). There is no formal “lifetime allowance” now, but extremely large pensions could face other tax considerations on withdrawal. The focus is on the annual cap of contributions. If you breach the AA, the excess is added to your income and taxed, but you can ask your pension scheme to pay the charge if it’s big (this is “Scheme Pays”).

Tip: If you’ve taken a taxable withdrawal from a DC pension, the £10k MPAA kicks in – keep this in mind if you “retire” but then return to work and want to keep contributing. Also, carry forward: if you didn’t use your full Annual Allowance in 2022/23, 2023/24, or 2024/25, you can still contribute that unused portion in 2025/26 (provided you had a pension in those years and have earnings high enough). This is useful if you get a windfall or big bonus and want to supercharge your pension.

4. Savings

Making the most of tax-efficient savings is key. Here’s what’s available in 2025/26:

ISA Allowances and Types: The ISA (Individual Savings Account) annual allowance remains £20,000 per person, frozen until 2030 by a recent decision. ISAs let you earn interest, dividends, or capital gains tax-free. You can split your £20k across different ISA types as you wish:

• Cash ISA: A tax-free savings account. Useful for risk-free interest (though rates should be compared with normal savings – if your interest is below the PSA limit, a Cash ISA’s benefit is mainly for higher earners or to protect very large balances). From April 2024, the minimum age for a Cash ISA is 18 (previously 16), aligning with other ISAs. If you’re 16–17, you can use a Junior ISA instead.
• Stocks & Shares ISA: Invest in funds, shares, etc., with all gains and dividends tax-free. Best for long-term investments (>5 years). Remember, inside an ISA you don’t use your dividend allowance or CGT allowance – everything is sheltered. You can open multiple ISAs of the same type in a year now (this rule changed in 2024) – e.g. you could have two Cash ISAs in one tax year (previously not allowed), as long as total paid in ≤ £20k.
• Lifetime ISA (LISA): For ages 18–39 to start. You can contribute up to £4,000 per year (this counts towards your £20k ISA limit) and receive a 25% government bonus. So max bonus £1,000 a year. LISAs are aimed at first-time home purchase (property value ≤ £450k) or retirement (you can withdraw from age 60). If you withdraw for other reasons, there’s a hefty penalty (essentially repaying the bonus + a bit more). You can only open one LISA per tax year and contribute to one LISA at a time. If you’re planning to buy your first home in the next few years or want an extra retirement boost, a LISA is very useful.
• Junior ISA (JISA): For under-18s. A parent/guardian can contribute up to £9,000 a year (2025/26) into a child’s Junior ISAs (combined limit). The money grows tax-free and the child can access it at 18 (at which point it converts to an adult ISA). Both cash and stocks JISAs exist. Encourage saving for children’s university or future – this grows outside the parent’s estate for IHT and tax-free for the child.
• Innovative Finance ISA (IFISA): Allows investment in peer-to-peer loans or crowdfunding debt with interest tax-free. Niche product – higher risk loans, so be cautious and diversify if using this.

ISA Rules Updates: New rules as of 2024 allow fractional shares to be held in ISAs (tax-free) – useful if you use app-based investing and buy slices of expensive stocks. Also, you can now make partial transfers of ISA money (you don’t have to transfer the whole account from the current year; you can move part of it). The ISA allowance is frozen at £20k until 2030, and there’s speculation about future reforms, but for now, maximize this yearly because you can’t roll it over – “use it or lose it” each tax year.

Personal Savings Allowance (PSA): Discussed in Section 1, this gives basic-rate taxpayers £1,000 and higher-rate £500 of bank interest tax-free. With interest rates relatively high in 2025, be mindful if you have large savings outside an ISA – exceeding the PSA means 20% or 40% tax on the rest of your interest. Joint accounts effectively split interest between holders for PSA purposes. If you have a lot of cash savings, consider Cash ISAs or Premium Bonds once your PSA is used.

National Savings & Investments (NS&I): NS&I offers government-backed savings products, some with tax advantages:

• Premium Bonds: A popular place to save. Instead of interest, you enter a monthly prize draw with tax-free prizes ranging from £25 to £1 million. The current prize fund rate is ~3.80% (variable). All prizes are tax-free. You can invest up to £50,000. Premium Bonds are effectively like an easy-access savings with a lottery element – returns vary by luck, but you won’t lose your capital (government-backed). They suit higher-rate taxpayers or those who maxed ISAs, since the prize rate is tax-free and compares decently to savings interest.
• NS&I Direct Saver / Income Bonds: These are standard savings accounts (currently ~4% interest) backed by the Treasury. Interest is taxable (counts toward your PSA), except NS&I also offers a Direct ISA which is tax-free (counts toward your ISA limit). The advantage of NS&I is 100% security (no £85k FSCS limit issues). They occasionally offer Green Savings Bonds, etc., which may have fixed terms.
• Index-linked Savings Certificates: NS&I used to offer these (tax-free interest linked to inflation) – currently not on general sale, but if you have old ones you can renew them and enjoy tax-free inflation-proof returns. Keep an eye if NS&I reintroduces any new issues.
• Other NS&I: Children’s Bonds (discontinued), Guaranteed Growth Bonds, etc. All NS&I products have no default risk (state-backed). Some (like Premium Bonds or certain certificates) are explicitly tax-free; others behave like normal bank accounts for tax.

Savings Strategy: Use your ISA allowance each year if you can – especially for investments (growth on shares and funds can compound tax-free). Use NS&I and Premium Bonds if you value security or have a special tax status need. Keep an emergency fund in easy-access savings (ensure the interest doesn’t far exceed your PSA unless in an ISA). For medium-term goals, consider fixed-rate accounts (e.g. 1–3 year fixed savings) – note that interest is taxed in the year it’s paid, which for multi-year bonds means all interest might count in maturity year. High-interest current accounts or Regular Savers can be useful to maximize interest within PSA.

Lastly, be aware of inflation vs. interest: With inflation around mid-single digits in 2024/25, the real return on cash might be small or negative. Thus, for long-term funds, investing (with its risks) might yield better real growth – which is why ISAs and pensions (invested in equities/bonds) are key tools.

5. Investments

Investing wisely can build wealth, and the tax system provides specific rules and some incentives for investments:

Capital Gains Tax (CGT): When you sell investments or property at a profit, CGT may apply. The annual CGT exemption for 2025/26 is £3,000 (sharply reduced from £12,300 two years ago). This means you can realize £3,000 of gains in the year tax-free (£1,500 for most trusts). Gains above that are taxed at 18% or 24% for individuals from April 2025 onward. Important: CGT rates were reformed in late 2024. Now, whether it’s shares or property, the rates are unified at 18% (if within basic rate band) and 24% (if in higher rate) for disposals after April 2025. Previously, residential property gains were taxed higher (28%), but now they fall under the same 18/24% regime. This somewhat increases CGT on financial investments (was 10/20% before) but lowers it for property gains at the top end.

• Example: You sell shares and make a £10,000 gain. If you have no CGT exemption left, and you’re a higher-rate taxpayer, the gain is taxed 24% = £2,400 CGT. If you sold a buy-to-let property with £10k gain, it’s also 24% (previously would have been 28%). Basic-rate taxpayers pay 18% on gains (provided the gain doesn’t push them into higher rate).

Remember, adding a gain to your income can push you into a higher tax band for CGT purposes – you look at your taxable income + gains to determine which CGT rate applies. If a gain straddles the threshold, you split it between rates.

Dividend Tax (outside ISAs/Pensions): Covered in Section 1. Dividends from stocks or funds have only a £500 tax-free allowance now, and then are taxed at 8.75%/33.75%/39.35%. This especially impacts small business owners who pay themselves via dividends and investors with substantial portfolios. Using ISAs and pensions to shelter dividend-paying assets is more important than ever, given the low allowance.

Tax-Efficient Investing Options:

• Stocks & Shares ISA: As noted, all gains and income tax-free. You can invest up to £20k each year. This is the first port of call for most individual investors due to its simplicity and tax benefits.
• Pension (SIPP or workplace): Contributions are tax-relieved (effectively you invest pre-tax money), the investments grow tax-free, and 25% can be taken tax-free at withdrawal (rest taxed as income). Pensions are extremely tax-efficient, especially if your time horizon is retirement and you want the upfront tax relief.
• Venture Capital Trusts (VCTs): Higher-risk, but offer 30% income tax relief on investment (up to £200k per year) and pay dividends tax-free. Must hold at least 5 years. VCTs invest in small unlisted companies and carry risk, but the tax relief and tax-free dividends attract some investors, typically higher earners with diversified portfolios.
• Enterprise Investment Scheme (EIS): Investing in qualifying startups, you get 30% income tax relief, and gains are free of CGT if held 3+ years. You can also defer existing capital gains by reinvesting in EIS, and if the EIS fails, you can claim loss relief. Annual limit £2m (for “knowledge-intensive” companies; £1m otherwise). EIS is quite niche and high-risk (startup investing), but the tax breaks are generous.
• Seed Enterprise Investment Scheme (SEIS): Similar to EIS but for very early-stage companies. Gives 50% income tax relief up to £200k invested per year, and CGT reinvestment relief. High risk but highest tax relief.
• UK Government Bonds (Gilts) & NS&I: Interest from gilts is taxable, but importantly capital gains on gilts (and qualifying corporate bonds) are CGT-free. So bond investments don’t incur CGT on price movements (though interest is still income-taxable). That said, most bond investors use ISAs or pensions to avoid tax on interest.
• Main Home and ISAs – CGT Exempt: Remember your primary residence is CGT-free when you sell (known as Private Residence Relief). And any investments held in an ISA or pension are outside CGT. These are your primary shelters. Also winnings from gambling or Premium Bonds are tax-free.
• IHT relief investments: Some AIM shares (if qualifying businesses) can be free of Inheritance Tax if held >2 years (Business Property Relief). This is estate planning rather than income/capital gains planning, but worth noting for high-net-worth individuals looking to reduce IHT while staying invested.

Recent Rule Changes (Investments): The major shifts have been reductions in tax allowances: the CGT annual exempt amount was cut to £6,000 in 2023/24 and now £3,000 from 2024/25 onward. The dividend allowance was cut from £2,000 to £1,000 (2023/24) then to £500 from April 2024. These changes increase the tax bite on investors holding assets outside wrappers. Additionally, as noted, the Autumn 2024 fiscal changes altered CGT rates effective 30 October 2024: for the latter half of 2024/25 there was a hybrid rate, and now from 2025/26 the new 18%/24% regime is in place.

On the positive side, tax simplification for non-residents: from April 2025, the UK has moved to a purely residence-based tax system for overseas income/gains – the remittance basis is abolished and long-term UK residents can no longer avoid UK tax on worldwide income by claiming non-dom status. This is mostly relevant to very wealthy non-domiciled individuals; for ordinary investors, the key takeaway is that the tax net is broadening.

Dividend Tax Hints: Given the low £500 allowance, if you have a substantial portfolio, try to hold income-generating funds/shares in an ISA/Pension. If you and a spouse both invest, make use of each person’s dividend allowance (and CGT exemption) by splitting ownership of taxable accounts. Also note, you do not pay NI on dividend or investment income, so company owner-managers often take a low salary (to hit NI thresholds) and more in dividends – that strategy still works but is less tax-advantaged than before due to higher dividend tax and lower allowance.

Capital Gains Management: Use the annual exemption (£3k) each year if you can – for example, you might sell some shares with gains up to £3k and immediately buy back similar exposure (a different ETF or mutual fund) to “reset” the cost basis without leaving the market (you cannot sell and repurchase the exact same stock within 30 days or you’ll trigger the bed-and-breakfasting rule; but you can buy a similar investment or use your ISA to buy back). Spouses can also transfer assets to each other tax-free to utilize both persons’ CGT allowances or to take advantage of one partner’s lower tax rate on gains. Planning sales across tax years can maximize exemptions (e.g. selling part just before 5 April and part just after to use two years’ allowances).

Rental Property and Other Investments: Rental income is subject to income tax (with only limited deductions, since mortgage interest is only eligible for a basic-rate tax credit). If you sell a rental property, you pay CGT (now at 18/24%). Note that when selling UK residential property, you must report and pay an estimate of CGT within 60 days of completion. The Buy-to-let environment is less favorable after recent tax changes (no mortgage interest deduction beyond 20% credit, 3% stamp duty surcharge on second properties, and reduced CGT allowance). Ensure to keep records of all capital improvements on property, as those can be deducted from gains.

Finally, consider “bed and ISA”: at the start of each tax year, you can sell some investments and rebuy them inside an ISA (using that year’s ISA allowance) – this realizes any gain (hopefully within the CGT-free band) and then shelters future growth inside the ISA. Given the low CGT exempt amount now, such strategies might be constrained, but it’s still useful for long-term tax sheltering.

6. Government Benefits

The UK welfare system provides various benefits depending on your circumstances – here’s an overview of key ones, with 2025/26 rates and rules:

Universal Credit (UC): This is the main benefit for people of working age (replacing income-based Jobseeker’s Allowance, Income Support, tax credits, etc.). It’s means-tested and paid monthly. UC is for those on low income (either out of work or low wages). Key points:

• Standard Allowance (per month): £316.98 (single under 25), £400.14 (single 25 or over); £497.55 (couple both under 25, combined), £628.10 (couple with one or both 25+). These are the base rates to cover living costs.
• Additional Elements:
  • Children: £339.00 for first child if born before 6 April 2017; £292.81 for a child born after that (and for second or third child only if exceptions to the 2-child limit apply). Note UC generally covers a maximum of 2 children unless exceptions (multiple birth, adoption, etc.).
  • Childcare Costs: You can claim back up to 85% of childcare costs, up to a max of £1,031.88 for one child, £1,768.94 for two or more children per month.
  • Limited Capability for Work (disability): If you are deemed to have Limited Capability for Work (LCW) there’s a legacy element £158.76 (though new claims no longer get this on its own). If you have Limited Capability for Work and Work-Related Activity (LCWRA – essentially unable to work), there’s an extra £423.27 per month. (Note: the government has announced plans to abolish the Work Capability Assessment by 2026, which would change how these disability elements are awarded.)
  • Carer Element: If you care for a disabled person 35+ hours/week (and they receive a disability benefit), you get a £201.68/month addition in UC (you can also separately claim Carer’s Allowance – see below – but if you do, that amount is deducted from UC).
  • Housing: UC can include help with rent (Housing Element). The amount depends on your rent and local housing allowance (for private tenants). Social housing tenants get eligible rent minus a possible under-occupancy deduction (“bedroom tax”). There’s a cap if you have high rent. Note: If you receive UC housing support, make sure to pay your rent as the benefit is paid to you (except in some managed payment cases).
• Earnings and Taper: If you work, your UC is reduced by a taper rate of 55% of net earnings above any Work Allowance. Work Allowance applies if you have a child or LCW: it’s £684 if you don’t get the housing element, or £411 if you do. Essentially, those amounts of earnings are disregarded. Beyond that, for every £1 you earn, your UC drops by 55p. There is no limit to how much you can earn and still get UC, but eventually the taper will reduce your UC to £0. You must report earnings each month (usually automated via HMRC for PAYE). The benefit cap may limit UC for higher benefit households (cap is £2,110/month in London, £1,835 outside for households, unless someone has a disability benefit or earns above ~£722/m which exempts the cap).
• Example: A couple over 25 with two kids (born after 2017) and rent £800 get a standard £628.10 + £292.81*2 kids + housing up to the local cap. If one earns £1,000 net/month, UC ignores £411 then deducts 55% of the remaining £589 = £323 from the UC. So work increases income but UC cushions with the partial taper.
• Claims: Apply online, one claim per household. It usually takes ~5 weeks for first payment (advances are available). UC is gradually replacing older “legacy” benefits – by 2025 many remaining tax credit or housing benefit claimants will be migrated to UC.

Child Benefit: A benefit for those responsible for children <16 (or <20 in approved education/training). Rates: £26.05 per week for the eldest/only child, £17.90 per week for each additional child (these are the rates as of 2025 after uprating). (2024/25 rates were £25.60 and £16.95, respectively, so they increased by ~1.75% in April 2025 – this low increase suggests a policy change in uprating formula.) Child Benefit is paid to the caregiver (often the mother by default). It isn’t means-tested per se, but the High Income Child Benefit Charge claws it back if either parent’s individual income > £50,000. Specifically, for income £50k–£60k, a tax charge applies equal to 1% of the benefit for each £100 of income over £50k. At £60k income, the charge equals 100% of the benefit (effectively nullifying it). This is done through self-assessment or PAYE. Tip: If one parent earns above £60k, you can opt out of receiving Child Benefit to avoid the hassle, but still submit the claim (tick “no payment”) so that you get NI credits towards State Pension if you are a non-working parent. Child Benefit is one per family, not per parent. It’s usually paid every 4 weeks.

Child Tax Credit / Legacy benefits: Child Tax Credit and Working Tax Credit are closed to new claims (since UC). If you still receive them, be aware rates are frozen and you’ll eventually be moved to UC.

Personal Independence Payment (PIP): A benefit for people under State Pension Age with long-term disabilities or health conditions, regardless of income. It has two components: Daily Living (if you need help with personal care, cooking, etc.) and Mobility (if you have difficulty moving around). Each component has two rates. 2025/26 weekly rates: Daily Living £73.90 (standard) / £110.40 (enhanced); Mobility £29.20 (standard) / £77.05 (enhanced). These went up ~2.7% in April 2025. PIP is assessed via a points system from activities; an independent health professional evaluates your abilities. If awarded, it’s usually for a fixed period (or ongoing in some cases). PIP is tax-free and not means-tested. Many other benefits (and UC) provide extra premiums if you receive PIP. Note: Attendance Allowance is the equivalent benefit for those over State Pension Age who need care – it pays £73.90 (lower rate) or £110.40 (higher) per week in 2025/26.

Carer’s Allowance: If you care for a disabled person at least 35 hours a week and they receive PIP (Daily Living component) or certain other benefits, you can claim Carer’s Allowance (CA). It is £83.30 per week in 2025/26. CA is taxable income (but no NI). However, earning more than £139 per week (after some deductions) disqualifies you, so it’s primarily for full-time unpaid carers or those with very low earnings. If you claim CA, the person you care for will lose the Severe Disability Premium in their benefits (if they had it). Also, claiming CA can reduce UC (UC has a carer element instead, as noted). Still, it provides NI credits and recognition of your caring role. There’s a “underlying entitlement” concept: you cannot be paid CA simultaneously with the State Pension or certain other benefits (they overlap), but you can still get the carer premium in means-tested benefits if you have the underlying entitlement.

Jobseeker’s Allowance (JSA): Largely replaced by UC for new claims. But New Style JSA (contribution-based) still exists if you paid enough NI in the last 2 years. It’s not means-tested (so you can claim even if your partner works or you have savings, unlike UC). Rates: £92.05 per week for age 25+, £72.90 for under 25. It’s paid for up to 6 months. You must be actively seeking and available for work, and sign on biweekly. Many unemployed people will instead be on UC, which includes a conditionality regime similar to JSA but is means-tested. Note: If you lose your job, you could claim both New Style JSA and UC at the same time – JSA giving a fixed amount (deducted from UC), but providing NI credits towards State Pension while on claim. There is also “New Style” Employment and Support Allowance (ESA) for those with health conditions (contributory ESA) – it pays £92.05/week after an assessment phase if you’re in the Support group. Income-based ESA is now part of UC.

Housing Benefit (HB): This benefit helps with rent, but new claims are mostly only for pensioners or those in certain specific accommodations. Working-age renters now claim housing costs via UC. If you are on HB already (and haven’t moved to UC yet), the amount is based on your rent and income. In private rentals, HB/UC housing element is capped by the Local Housing Allowance (LHA) – which depends on your local area and number of bedrooms needed. LHA rates have been frozen since 2020, meaning housing benefit hasn’t kept up with rent increases generally. This freeze continues in 2025 (no inflation uprating of LHA). If you’re in social housing, HB/UC covers your rent minus any “bedroom tax” (14% cut for one spare room, 25% for two). There are discretionary housing payments councils can give if you have a shortfall. Council Tax Reduction (CTR) is separate – apply to your local council if you’re on low income; it can reduce your council tax bill substantially (often all the way to zero for those on the lowest incomes). CTR rules vary by council.

Other Welfare Programs:

• Benefit Cap: Mentioned under UC – limits total household benefit income (excluding certain benefits like PIP) to ~£22k/year (or ~£25k in London) for non-working families. If affected, the excess is knocked off your HB or UC.
• Bereavement Support Payment: If your spouse/civil partner dies, and you’re under State Pension Age, you might get this new lump-sum and monthly payment (replaced the old Widowed Parent’s Allowance etc.). It’s not means-tested but is time-limited (18 months). In 2025, the initial lump sum is around £3,760 (if you have children) and monthly £315, or £2,500 lump/£100 monthly if no children. Check rules if unfortunately applicable.
• Guardian’s Allowance: For those raising a child whose parents have died (or one has died and the other is missing). It’s £20.40 a week extra, tax-free, on top of Child Benefit.
• Disability Living Allowance (DLA): Only for children now (as PIP replaced it for 16+). It has care and mobility components; rates vary (a child on highest care + highest mobility gets ~£101 + £77). If your child has disabilities, claim DLA – it can also increase your UC or tax credits via disabled child additions (as seen above, UC adds £158.76 or £495.87 for disabled kids).
• Industrial Injuries Disablement Benefit: For work-related injuries/diseases, if you’re an employee. Rates vary by assessed disablement (%). (For example, 100% disablement is ~£225/week).
• Pension Credit: Mentioned earlier – if you’re over SPA with low income, check eligibility. It tops up weekly income to £227.10 (single) or £346.60 (couple). It can also entitle you to free TV license (if 75+), council tax reduction, and extra help (if you get the “Savings Credit” part or have disabilities). Many pensioners don’t realize they qualify, especially if they have modest pensions – but if your total income is below the thresholds (or slightly above, if you have a disability or caring responsibility or certain housing costs), it’s worth checking.
• Free Childcare Schemes: While not cash benefits, note that from April 2024 and expanding through 2025, the government is increasing free childcare hours. By 2025, working parents of children from 9 months up to 3 years will be entitled to up to 30 hours/week of free childcare in England (phased: 15 hours for under-2s from April 2024, extending to 30 hours for all under-3s by Sept 2025). This is in addition to the existing 15 hours for 2-year-olds on certain benefits and the universal 15 hours for 3–4-year-olds. This expansion effectively is a huge benefit for working parents, saving thousands in childcare costs. Also, Tax-Free Childcare gives a 25% top-up on parental deposits (up to £2,000 annual top-up per child under 12) – i.e. for every £8 you pay your childcare provider through the scheme, the government adds £2.
• Cost of Living Payments: In recent years (2022–2024), the government provided special one-off payments to those on means-tested benefits, disability benefits, and pensioners to help with energy bills. By 2025, these had mostly tapered off as energy prices stabilized, but it’s possible new payments could be announced if inflation spikes or other crises occur. Always check current announcements.

Navigating the System: The benefit system is complex. Use tools like a benefits calculator (Turn2us, Entitledto, or the one on Gov.uk) to check what you can claim. Universal Credit has replaced many benefits, so most working-age claims go through UC. If you have a change in circumstance (job loss, new disability, new child, rent increase), see if that triggers a new UC claim or additional elements. If you’re on legacy benefits, be careful – some changes (like moving in with a partner who’s on UC or a new claim scenario) can force a move to UC, and once on UC you generally can’t go back. And notably, report changes promptly to avoid overpayments.

Finally, appeals: If you are denied a benefit or given a lower award (common with PIP or LCWRA decisions), you have the right to mandatory reconsideration and appeal. Many who appeal PIP/ESA decisions win at tribunal. Seek advice from Citizens Advice or welfare rights organizations if needed.

7. Borrowing Rules

Whether it’s a mortgage for a home or short-term credit, borrowing is heavily regulated to protect consumers and ensure affordability. Here’s what to know:

Mortgages:

• Affordability Checks: Lenders must assess if you can afford the mortgage now and under stress scenarios. The Bank of England’s formal affordability stress test (which required checking if you could afford payments at a 3% higher rate) was withdrawn in 2022, but lenders still apply their own stress tests. Typically they will consider your income, expenditures, and assume an interest rate well above the current rate to ensure you could cope with rises. Your credit history, debt-to-income ratio, and loan-to-income (LTI) multiple also matter. There’s an FCA rule that no more than 15% of new mortgages can have LTI > 4.5. In practice, most borrowers max out around 4.5–4.75 times income (some high earners or special cases might get up to 5.5x).
• Loan-to-Value (LTV): The ratio of the loan to the property value. Higher LTV = riskier for lender. 95% LTV mortgages (5% deposit) are available, especially for first-time buyers, but often at higher interest rates. 90% LTV is a bit more common. Best rates are at lower LTVs like 60%. If you can push your deposit from say 10% to 15%, you might get a noticeably better rate. Note that in 2021-2023 the government ran a Mortgage Guarantee Scheme to encourage 95% LTV loans; that scheme ended in Dec 2023, but lenders have continued to offer high-LTV products on their own. Negative equity risk: If house prices fall and you have a high LTV, you could owe more than the home’s worth – something to be mindful of if only putting 5% down.
• Help to Buy & First-Time Buyer Schemes: The Help to Buy Equity Loan scheme (where the government lent 20% toward a new-build purchase in England, or 40% in London) closed to new applicants in Oct 2022 and fully ended by March 2023. If you already have a Help to Buy loan, be aware of when interest fees start (after year 5 a 1.75% fee kicks in) and consider repayment or staircasing strategies. The Help to Buy ISA (a precursor to LISAs) closed to new accounts in 2019, though existing holders can still use them (government 25% bonus on savings for first home purchase, max bonus £3k). A newer initiative, the First Homes Scheme, offers a 30% discount on certain new-build homes for first-time buyers who are local or key workers – these homes keep the discount for future sales. Shared Ownership remains an option: you buy part of a home (say 25%) and pay rent on the rest to a housing association, with the ability to “staircase” your ownership up over time. It lowers the deposit requirement but note you have both mortgage and rent obligations and shared ownership properties can have restrictions. Stamp Duty Relief: First-time buyers pay no Stamp Duty Land Tax (SDLT) on property purchases up to £425,000 (and reduced SDLT up to £625k). This relief is set to continue, though note that a temporary general SDLT cut (nil rate band was £250k) ended on 31 March 2025, so stamp duty for non-first-time buyers is now a bit higher again (nil rate band back to £125k from April 2025).
• Mortgage Types: Most choose fixed rates (2-year or 5-year fixes are common) for stability. In 2025, interest rates are higher than the ultra-low levels of the late 2010s; a 2-year fix might be around 5–6% (just an example, rates vary). There are also tracker or variable rates which follow the Bank of England base rate (or a lender’s SVR). With base rate around 5% in 2025, trackers can mean rising costs if rates climb. Given economic conditions, get advice on whether to fix or float. Overpayment: Many mortgages allow 10% overpayment per year without penalty – a smart move if you want to reduce future interest and become mortgage-free sooner, especially now that rates are higher (overpayments give a guaranteed “return” equal to your interest rate).
• Affordability vs Term: Lenders may extend term (e.g. 35-40 years) to reduce monthly payments and meet affordability, but note you pay more interest overall and could carry debt into later life. Many now take mortgages past age 65 – but you need a plan for how to pay in retirement if so (pension income considered, or plan to downsize).

Credit Cards:

• Regulations and Protections: Credit cards have strong consumer protections under the Consumer Credit Act. Notably Section 75: if you buy something £100–£30,000 on a credit card, the card provider is jointly liable if the product is faulty or the company goes bust. Always useful for big purchases.
• Interest and Fees: There’s no legal interest cap for credit cards (unlike payday loans), but competition keeps rates in check – typical APRs are 20%–30%. If you pay the full balance by the due date, you pay no interest on purchases (grace period). Missing payments can lead to late fees (capped at £12 by industry practice) and hurt your credit score.
• Persistent Debt Rules: The FCA has rules to help customers in “persistent debt” (paying lots of interest, not clearing principal). If you pay only minimums such that after 18 months you’ve paid more in interest than principal, the card issuer will contact you to recommend higher payments. After 36 months of persistent debt, they must offer a plan to repay over a reasonable period (which could include rate reductions) or the account might be suspended. So it’s in your interest to pay more than the minimum – ideally clear as much as possible to avoid these interventions and, of course, to save on interest.
• Credit Limit and Affordability: When you apply, the issuer assesses income, existing debts, etc. They may start with a modest credit limit and increase it over time if managed well (though you can opt out of automatic increases). They shouldn’t raise limits if you’re in persistent debt without your consent.
• Balance Transfers: These let you move debt to a new card with a 0% promotional rate for X months (with a fee). If you have card debt at high interest, consider a balance transfer to reduce interest – but aim to pay off within the promo period, and avoid new spending on that card unless it’s 0% for purchases too.

Credit Scores:

• Importance: Your credit score (with Experian, Equifax, TransUnion) affects ability to get loans, credit cards, mortgages, even mobile contracts. Factors: On-time payment history is crucial. Credit utilization (balances vs limits) – using <30% of your available credit is generally seen as positive. Length of credit history helps (keep old accounts open if managed well). New credit applications: too many in a short time can ding your score. Defaults, CCJs, bankruptcies severely hurt your score for 6 years.
• Checking Your Report: You can check your credit reports for free – statutory reports are free (under GDPR you have right to your data), and various services (like ClearScore, Credit Karma, MSE’s Credit Club) give free access to your score or report. It’s wise to check annually for errors or any fraudulent accounts.
• Improve Your Score: Pay all bills on time (even one missed payment can be a red mark). Register on the electoral roll at your current address – this boosts verification and score. If you have no credit history, consider a credit builder card or a small loan to create a positive history (but manage it carefully). Avoid constantly maxing out cards – even if you pay in full, high utilization at statement time can lower your score.
• Hard vs Soft Searches: When you formally apply for credit, it leaves a “hard” search on your report, visible to others (too many of these in short span can scare lenders). Soft searches (like eligibility checks or your own access) don’t affect your score. Using an eligibility checker before applying (to see odds of approval) is smart.
• 2025 Update: Buy Now Pay Later (BNPL) (like Klarna, Clearpay) – previously often unreported – are becoming part of credit files. The major credit agencies have started recording some BNPL usage. Also, BNPL is set to come under FCA regulation by 2025. Treat BNPL like credit – just because it’s easy to split payments doesn’t mean it’s free money; missing BNPL payments could soon impact credit files.

Payday Loans & High-Cost Short-Term Credit:

• The FCA imposed a strict cost cap on payday loans in 2015: interest and fees can be max 0.8% per day of amount borrowed, default fees max £15, and you can never pay more than 100% of what you borrowed in total. This means, for example, if you borrow £100, even if you roll it over, you won’t repay more than £200 total. This cap protects borrowers from the old days of astronomical rates and runaway debts. Most traditional payday lenders closed or changed model after this – so payday loans are less prevalent now.
• Alternatives: If you need short-term cash, consider a credit union loan or an advance on Universal Credit if applicable. High-cost instalment loans still exist, but all are subject to the same cap rules. Avoid unauthorised overdrafts – banks now mostly charge fixed fees or interest comparable to ~40% EAR for overdrafts, due to rule changes abolishing high fixed fees.
• Illegal Lending: Loan sharks are illegal. If you’re caught in that situation, there are confidential help lines. Always use regulated lenders (you can check the FCA register).
• High-Cost Catalogues/Rent-to-Own: Firms like BrightHouse (now closed) used to charge high prices for goods on weekly payment. The FCA also capped rent-to-own costs: now total cannot exceed the cost of the item plus 100%. These sectors shrank after caps and FCA enforcement.
• Doorstep Lending: Provident, a big door-to-door lender, exited the market in 2021. Fewer doorstep collectors now. If someone offers high-cost cash loans at your doorstep, ensure they’re licensed. This industry’s decline is a win for consumers, albeit it leaves some without easy credit – local credit unions and community schemes are filling some gaps.

Overdrafts: Not a separate bullet, but note: Banks can no longer charge higher fees for unarranged overdrafts – they now have a single interest rate. Many banks charge ~35–40% APR on overdrafts. That’s high, so overdrafts are best for very short-term usage. If you frequently go overdrawn, talk to your bank or seek a cheaper form of credit.

Mortgage Market in 2025: A quick note – with higher interest rates, lenders are cautious. If you’re struggling with payments, contact your lender early; FCA guidance encourages flexibility (temporary interest-only, term extension, etc. without credit file stigma if done correctly). For first-timers, property prices and rates affect affordability – there are rumblings of new schemes perhaps, but nothing concrete post-Help to Buy. In Scotland and Wales, separate small schemes exist (like shared equity programs).

Summary Tip: Only borrow if you have a plan to repay. Use cheap credit for needs, not wants. Always read the APR and total cost. And remember, your home is at risk if you don’t keep up mortgage payments – so prioritize that and insure yourself (e.g. income protection insurance) if others rely on you.

8. Self-Employment

If you’re a freelancer, contractor or run a sole trader business, here are key financial rules and updates:

Income Tax & NI for Sole Traders: As discussed in Sections 1 and 2, sole traders pay income tax on profits (after allowable business expenses) at 20/40/45% rates like employees, and Class 2/4 NIC on profits (with Class 2 now auto-credited and Class 4 at 6%/2% rates). You report profits via the annual Self Assessment tax return (due by 31 Jan following the tax year for online filing). If tax/NIC due is over £1,000, HMRC will usually ask for Payments on Account towards the next year (each payment on account is half your prior year tax, due 31 Jan and 31 July). This can catch new businesses off guard – essentially in the first profitable year you might have to pay 150% of that year’s tax (current year + advance for next). Budget accordingly.

Allowable Expenses: You can deduct business expenses that are “wholly and exclusively” for business from your income, which reduces taxable profit. Common allowable expenses: office supplies, phone & internet (business portion), travel costs (mileage at 45p/mile for car up to 10k miles, then 25p, or actual car expenses proportion), train/bus/taxi for work trips, advertising/website costs, professional fees (accountant, solicitor for business), insurance, office rent or a proportion of home utilities if working from home (simplified flat rate or actual proportion – e.g. you can claim a flat £10/month if working at home 25–50 hours per month, etc., or apportion bills by floor space/time). Stock or materials, uniforms, trade subscriptions, and bank charges or credit card fees for business accounts are allowed. Things that are not allowed: your own salary (since as a sole trader you can’t employ yourself – drawings aren’t an expense), client entertainment, fines (e.g. parking tickets), personal expenses mixed in (if partially business, apportion and only claim business part). For equipment like laptops or tools, you usually claim capital allowances – but there’s a £1 million Annual Investment Allowance that effectively lets most small businesses deduct equipment cost 100% in the year of purchase. In practice, your accountant or software will handle it via “allowances” but it means you get full relief on plant and machinery.

• Simplified vs Actual: HMRC allows some flat-rate claims (mileage, use-of-home, etc.) which simplify record-keeping. If you use your car a lot for business, compare the 45p mileage vs actual car costs (fuel, repairs, insurance) – once you choose one method for a vehicle, stick with it for that vehicle’s life.

Making Tax Digital (MTD) for Income Tax: Big changes are on the horizon. MTD for income tax means quarterly digital reporting of income and expenses. It was initially scheduled for 2024 but has been delayed. Timeline: From April 2026, self-employed with income over £50,000 must keep records digitally and send summary updates to HMRC quarterly (with a final adjustment EOY). From April 2027, those over £30,000 income follow. (For incomes below £30k, the government is re-thinking if/when to mandate MTD – possibly 2028 or later, or they may not bring the smallest businesses in at all under current plans.) If you’re above £50k, you have about a year to prepare for MTD. Using accounting software (many MTD-compliant ones exist) will be necessary. If you’re below £50k, you get a bit more time. Note: General partnerships will be in MTD from 2026 as well, but most small partnerships may fall under those thresholds. MTD will change how you interact with HMRC – more frequent reporting, but tax still paid annually (for now). Action: Start using a digital bookkeeping system if you aren’t already, so the transition is smoother.

Basis Period Reform: Alongside MTD, if you’re not already aware, the tax year 2023/24 was the “transitional” year for moving all sole traders to a tax-year basis. From 2024/25, sole traders are taxed on profits for the tax year itself, regardless of accounting year-end. In short, if you didn’t have a 31 March or 5 April year-end, you likely had to allocate/adjust profits in 2023/24 to align to 5 April. After that, everyone is taxed on actual profits in each tax year (no more basis period oddities or overlap relief except transitional). This is technical, but just know that going forward it simplifies things – your accounts may need to be aligned to the tax year or you apportion profits that fall into the tax year.

VAT and the Self-Employed: The VAT registration threshold is £85,000 turnover (gross sales) in a 12-month period, unchanged and now frozen until March 2026. If your business crosses this, you must register for VAT (and charge customers VAT, but can reclaim VAT on business inputs). If your turnover stays below £85k you can remain unregistered, which avoids VAT admin but also means you can’t reclaim input VAT – an important factor in pricing and costs. If most of your customers are the public (who can’t reclaim VAT), you might prefer staying under threshold; if you sell B2B and they can reclaim, registering once close to threshold makes sense to claim your inputs.

• Flat Rate Scheme: If turnover <£150,000, you can use the VAT Flat Rate Scheme (FRS). You charge clients 20% VAT normally, but instead of tracking all VAT on expenses, you pay HMRC a fixed percentage of your gross turnover, with the percentage depending on your industry (e.g. a freelancer writer might have 12%, IT consultant ~14.5%, etc.). This simplifies VAT accounting and sometimes can be financially beneficial if you have low VATable expenses. Note there’s a 1% discount in your first year of VAT registration on flat rate. FRS became less profitable after anti-avoidance rules for “limited cost traders” (if you spend very little on goods, you might have to use a high flat rate of 16.5%). Evaluate carefully or ask your accountant.
• Making Tax Digital for VAT: This is already in effect – all VAT-registered businesses must keep digital records and file VAT returns via compatible software. So if you’re VAT registered, you likely already use some digital method.

IR35 and Off-Payroll Working: This concerns contractors who work through their own limited company (Personal Service Company). IR35 rules aim to catch “disguised employment” – if you work like an employee for a client, HMRC says you should pay taxes like one. Inside IR35 means essentially your pay from that contract should be treated as salary (subject to PAYE tax and NI), Outside IR35 means you’re a genuine business and can take dividends etc. Off-Payroll Working Rules (2021): In the public sector and medium/large private companies, the client is responsible for determining IR35 status and must deduct PAYE if inside IR35. In practice, many big firms now put contractors on payroll or via umbrella companies. In April 2023, there was political back-and-forth about repealing these rules, but ultimately the rules stayed – so medium/large clients carry the IR35 determination burden. If you’re contracting to a small private company, the old IR35 (where you assess and can be held liable) still applies. Non-compliance can lead to big tax bills, so take it seriously.

• Practical tip: If you have only one major client and they supervise/direct/control your work similar to an employee, you’re likely inside IR35. If you have a lot of autonomy, can substitute someone else to do the work, carry business risk (fixed price contracts, obligation to correct work in own time, etc.), you have a better case for outside IR35. Use HMRC’s CEST tool (Check Employment Status for Tax) but be cautious – it doesn’t cover every scenario, though HMRC says they’ll stand by a result if input truthfully.
• Umbrella Companies: Many contractors now use umbrellas – essentially you become an employee of the umbrella, which bills the client. The umbrella handles payroll, deducting PAYE tax and NI, and often you get some employment rights (like holiday pay – though it’s often folded into the rate). Ensure any umbrella you use is compliant (no dodgy loan schemes). Fee Payer: If you are caught by off-payroll rules, the entity paying your company is responsible for PAYE. For small clients (exempt from off-payroll rules), your company would be fee payer if IR35 applies – meaning you should run the income through PAYE in your company. If HMRC later finds you wrongly claimed to be outside IR35, they will seek back taxes (income tax, employee NI and employer NI) which can be very costly.

“Sole trader vs Ltd Co”: Many self-employed consider forming a limited company. A company pays Corporation Tax (25% in 2025 for most, although if profits <£50k, a lower 19% marginal rate applies via the small profits relief). You as owner then pay tax on what you extract (salary/dividends). The dividend tax has gone up and Corporation Tax is higher now, reducing the tax efficiency of the company route compared to a few years ago. Roughly, one might say total tax+CT on profits via a company can be around 45-50% if you take all profit out, vs 40% income tax + 2% NIC if sole trader at higher rate – so the differences are not huge unless you can use the company to split income with a spouse shareholder or retain profits in the company (to then invest or for future use). Also consider limited liability – a company legally separates personal and business assets, potentially valuable if business could incur debts or legal issues. For many freelancers with modest income, remaining a sole trader is simpler and fine. If you do incorporate, be aware of IR35 if you then are the contractor under your own company.

Allowable Expenses Recap & Recent Updates: COVID support schemes are gone (SEISS grants were taxable in years received). The rules on claiming home office expenses haven’t changed: you can use simplified flat rates (e.g. £26/month if you work 51+ hours/month from home) or actual proportion of bills. One change: the mileage rate for electric cars remains 45p (same as petrol) – no separate rate; but the Advisory Fuel Rates for company cars now include electric (5p/mile for electric reimbursement). If using your personal car for work as a sole trader, the 45p covers all costs (including “fuel” electricity if EV).

Cash Basis: Small unincorporated businesses can choose cash basis accounting if turnover <= £150k. This means you only count money in/out, not accruals. It’s simpler and defers tax on unpaid invoices. However, with basis period reform and MTD coming, many might stick to accrual. Cash basis also restricts some deductions (like interest max £500). But if you have no stock and few accruals issues, cash basis is fine and often simpler for one-person businesses.

Insurance & Contingency: Not a regulation, but ensure you have appropriate insurance (public liability, professional indemnity if needed). Also, as self-employed, no sick pay – consider building an emergency fund of 3-6 months expenses or getting income protection insurance.

IR35 Off-Payroll Note: In Spring Statement 2025, the new government hinted at merging NI and income tax for employees or revisiting how freelancers are taxed – no concrete changes yet, but keep an eye out. For now, abide by current rules.

VAT Flat Rate minor update: If you’re a “limited cost business” (spend <2% of turnover on goods), your flat rate is 16.5%. This basically yields very little benefit (it’s equivalent to paying 19.8% of net turnover, almost the VAT you collect). Many consultants find they fall in that category and thus often leave FRS. However, if you do spend just above the threshold or are in a category with a low flat rate (like food retail 4% or certain manufacturing), FRS can still save time.

Sole Trader & Benefits: If you have low profits, you may qualify for UC – you’d report earnings monthly. Note UC assumes a “Minimum Income Floor” after 12 months of self-employment (basically expecting you to earn at least roughly 35h * minimum wage per week). During COVID this was suspended; it’s back now. If your earnings are below the floor, they may reduce UC as if you earned the floor (unless you’re in a start-up period or have LCW). Keep that in mind if you’re claiming UC while self-employed.

IR35 for Self-Employed vs Employed Status: Note IR35 doesn’t apply to pure sole traders (only to intermediaries like your own Ltd). But even as a sole trader, HMRC or tribunals might deem you an employee of your client in some cases (for rights or tax), though that’s less common with self-employed because there’s no intermediary. Just ensure contracts reflect true business-to-business relationships.

In summary, as a self-employed person, pay attention to tax deadlines (31 Jan final balancing payment and first payment on account, 31 July second payment on account). Keep good records – digital if possible, ready for MTD. Plan for tax bills by setting aside money from each payment (e.g. 25-30% of each invoice for tax+NI if profits will be taxed at basic rate, more if higher rate). And consider consulting an accountant, especially now with basis period changes and MTD – a professional can save you more than their fee in optimizing and avoiding pitfalls.

9. Recent and Upcoming Changes (Legislation & Policy)

The personal finance landscape is ever-evolving. Here are some recent and upcoming changes around 2025/26 to be aware of, many of which we’ve touched on in each section:

• Tax Threshold Freezes and Adjustments: The government has frozen the Personal Allowance and income tax bands at 2021 levels (£12,570 basic allowance, £50,270 higher-rate threshold) until April 2028. This “stealth tax” means as earnings grow (or with inflation), more people get dragged into higher tax brackets. Similarly, the Inheritance Tax nil-rate band (£325k) and residence nil-rate band (£175k) are frozen until 2028, now extended to April 2030 by the Spring 2025 Statement. The government signaled no IHT threshold rise, effectively increasing the tax take from estates as property values climb. There’s political discussion about IHT (one party considered abolishing it on estates under £2 million), but nothing concrete yet – for now, threshold freezes continue.
• National Living Wage (NLW): The NLW (legal minimum for age 23+, though from 2024 it now applies from age 21+) had a significant boost in April 2025 to £12.21 per hour (up from £11.68 in 2024). Younger minimum wages rose too (21-22 Year Old Rate now aligned at £12.21; 18-20 Year Old Rate ~£10.00; Under-18 £7.55; Apprentice rate £7.55). This helps low-paid workers’ incomes but also increases wage costs for businesses.
• NIC Overhaul 2025: As covered, from April 2025 employee NI main rate cut to 8%, employer NI up to 15%, secondary threshold slashed to £5k‍. Also Employment Allowance doubled to £10,500, and the small employer eligibility restriction (previously only if NIC bill <£100k) was removed – so now all businesses can claim EA, giving a £10.5k discount on their employer NIC bill. These were announced in the Autumn 2024 Budget as a growth measure to encourage employment, while shifting some burden to larger payrolls.
• Dividend & CGT Cuts: Dividend allowance down to £500 (from £2k two years prior), CGT allowance to £3k (from £12,300 likewise) – confirmed in the Autumn 2022 budget and effective by 2024/25. This has now fully hit in 2025/26: investors and company owners face higher effective taxes, as described earlier. It’s unlikely these allowances will rise soon; they may remain low or be eliminated entirely in future fiscal plans.
• CGT Rate Reform: In a surprise move, the Autumn 2024 Statement implemented new CGT rates from Oct 2024/Apr 2025 – moving away from the long-standing 10/20/18/28 system to a simpler 18% basic, 24% higher structure. This was part of a reform to align taxation of capital a bit closer with income, and to offset revenue lost from the NI cuts. Additionally, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) which gives a special 10% rate on business sale gains up to £1m, has been altered – gains from April 2025 qualifying for BADR are now taxed at 14%, reducing that relief’s generosity (it appears the government has increased that rate from 10% to 14%). Similarly, Investors’ Relief (for external investors in unlisted trading companies, previously 10%) is now 14%. These changes were aimed at narrowing the gap between how different types of gains are taxed and raise some revenue. (Those who sold a business before April 2025 likely locked in the 10% rate.)
• Pension Reforms 2023-2024: The Spring Budget 2023 by the prior government radically changed pension tax limits – the Annual Allowance up from £40k to £60k, MPAA up to £10k, Tapered AA thresholds raised, and the Lifetime Allowance charge removed (and LTA fully abolished in 2024). These are now in effect for 2025 – encouraging higher earners (notably doctors, etc.) to keep working and contributing to pensions without tax penalty. The only caution is the tax-free lump sum is now effectively capped at 25% of £1,073,100 (unless protected), i.e. ~£268k, via the new Lump Sum Allowance. But otherwise, no lifetime limit – a major change in pension planning. Keep an eye if a future government would reintroduce an LTA-style cap (the current opposition indicated no immediate reversal, but longer term pension tax relief is an area often targeted for savings).
• Auto-Enrolment Extension: As noted, legislation passed in 2023 to allow lowering the auto-enrolment age to 18 and removing the lower earnings band. The government is expected to lay out a timetable – possibly implementing by 2025 or 2026. This will mean more young people saving earlier and every pound of earnings will count for contributions (if implemented, no more £6,240 that doesn’t count – contributions from first £1 of earnings). Good for building retirement pots, though it slightly increases costs for employers and employees.
• Universal Credit Changes: The government has been tweaking UC. Work allowances and taper were improved (taper to 55% from 63% in late 2021). In 2025, attention is on encouraging more people into work: there are stricter requirements for jobseekers, and more support for childcare (as described, free hours expanding and UC childcare element increased). Also, managed migration of the remaining legacy benefit claimants to UC is continuing, with a goal to complete by 2028. Specific cohorts, like older ESA claimants, are being moved onto UC with transitional protection so they don’t lose money immediately. Additionally, the government announced the intent to remove the Work Capability Assessment by 2026/27, meaning eligibility for the extra LCWRA element in UC would instead be linked to receiving a disability benefit (PIP) and a new health element – a big reform to simplify disability benefits and “make work pay” (since under new system, being on UC for health won’t automatically mean you can’t work at all). Legislation is pending – if you’re on disability benefits, watch for changes around 2026.
• Spring Statement 2025: The new Chancellor’s first fiscal event (March 2025) was relatively light on immediate tax changes, focusing on fiscal stability. They did confirm extending freezes (as mentioned for IHT to 2030). They ended the temporary SDLT cuts in Mar 2025 (so SDLT thresholds reverted). They also announced measures to tackle tax avoidance and unpaid tax – for instance, investing in HMRC compliance and closing some loopholes (one area of interest is clamping down on umbrella company abuses and on offshore promoter arrangements). They also slightly revised OBR forecasts – not directly personal finance but indicating the economic outlook (GDP growth downgraded for 2025, etc. as per HoC Library).
• Non-Doms and IHT Residence Basis: A significant reform from the previous government taking effect 6 April 2025: the taxation of non-domiciled individuals. The remittance basis (where non-doms could pay an annual charge to keep foreign income/gains untaxed in UK) is abolished from 2025. Now all UK residents of >4 years are taxed on worldwide income/gains (with a limited 4-year exemption for new arrivals under a Foreign Income & Gains (FIG) regime). Also, Inheritance Tax changed to a residence-based system: if you’ve been UK-resident 10 of the last 20 years, you’re treated as UK-domiciled for IHT (called “long-term resident”), and IHT will apply to worldwide assets. These are major but affect a small segment (international high-net-worth individuals). If you are globally mobile or have a foreign domicile, seek tax advice – the playing field changed in 2025, with transitional provisions like a Temporary Repatriation Window (able to remit pre-2025 untaxed gains at 12% or 15% in next 3 years).
• Student Loans: For those who took loans from Sept 2023 onwards (Plan 5 loans in England), the repayment threshold was lowered to about £25,000 and the loan term extended to 40 years. This effectively means graduates will pay more and for longer. This doesn’t directly tie into 2025/26 taxes, but it’s a personal finance change: new graduates will see 9% of income over ~£25k deducted. Older Plan 2 loans (2012-2023 starters) still have a £27,295 threshold (rising with inflation) and 30-year term. So if you’re in the younger cohort, factor this into your net income calculations.
• Renters Reform and Housing: The government (as of 2023/24) proposed a Renters Reform Bill to end “no fault” evictions (Section 21) and make other changes in England. By 2025, this may become law – meaning more security for tenants. While not directly financial, it affects housing stability. Also, social housing rent increases were capped at 7% in 2023/24; for 2024/25 they returned to normal formula (CPI+1%). Council Tax: no central government cap for 2025 was announced yet, but expect most councils to raise near allowed limits (5% or so) given budget pressures.
• Cost of Living Adjustments: Benefits (UC, PIP, etc.) and State Pension got a 10.1% rise in April 2023, ~6.7% in April 2024, and 4.1% in April 2025 (pensions triple lock yielded 4.1% because earnings were a bit higher but was an outturn of a policy choice). These inflationary increases help keep real value, but if your wages didn’t rise similarly, you feel the squeeze more (and tax threshold freezes mean fiscal drag). Plan your budget with inflation in mind: energy bills came down from the peaks, but food prices and rents remain elevated. Use any government support available (e.g. Energy Price Guarantee ended, but check if you’re eligible for Household Support Fund help via councils, etc.).

In summary, for 2025/26 you’re navigating a period of high inflation-adjustments but frozen tax thresholds – a squeeze that means careful planning is needed. Leverage tax shelters (pensions, ISAs), be aware of new rules (NI cuts, CGT/dividend changes, auto-enrolment changes), and watch out for legislative shifts like the ones above. The Spring 2025 fiscal outlook suggests no immediate tax cuts – deficit pressures remain – so these freezes and stealth taxes are the backdrop for the next few years. If any major changes (like a new government altering tax policy) occur, Mogul will update you. Stay informed and proactive with your personal finances, and you’ll weather the changes effectively.

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