Income, savings and planning for individuals and families in 2026

Manage hidden top rates of tax

Where income exceeds £100,000, there are additional points to watch. Though the 45% additional rate of income tax only applies to taxable income over £125,140, the effective rate of tax may be higher than this, as the personal allowance is reduced where adjusted net income is more than £100,000.

The personal allowance thus falls by £1 for every £2 of adjusted net income over £100,000, and where adjusted net income is £125,140 or more, all personal allowance is lost. The effective ‘hidden’ rate of tax on this income, is therefore 60%.

Action point: Minimise loss of personal allowance

It may be possible to reduce taxable income and keep the personal allowance by making personal pension contributions, or donations under gift aid.

Tax and the family

Married couples

Spouses are taxed independently. Each has their own personal allowance and basic rate band. There is no sharing of tax bands.

Married couple’s allowance is available where one party was born before 6 April 1935. The blind person’s allowance, if unused, can be transferred to the other spouse, but otherwise part of the personal allowance can only be transferred between spouses in specific circumstances (below).

Marriage allowance

The transfer is sometimes called the marriage allowance and it can be available where one spouse has not used all their personal allowance and the other does not pay tax at higher rates. If eligible, one spouse can transfer 10% (£1,260) of the personal allowance, reducing the other’s tax by up to £252 (20% of £1,260).

Planning for tax efficiency

Tax bills can be minimised where spouses aim to:

• Distribute income optimally between them
• Use their personal allowance, savings allowance and dividend allowance fully
• Manage exposure to higher rates of tax.

Where each spouse is in a different tax band, distribution of income has always been important. But with the personal allowance and key tax thresholds frozen until 2031, fiscal drag will push more people into higher rates of tax each year. This makes the opportunity to minimise the impact on the overall household particularly valuable.

Planning for jointly owned assets

Where assets are owned in joint names, any income is assumed to be shared equally between spouses for tax purposes, even if the asset is not actually owned in a 50:50 ratio.

This treatment can be changed to reflect the actual share of ownership. It is done by making a declaration of beneficial interests in joint property and income to HMRC on Form 17. Evidence is needed to support this.

Close company shares: The treatment of shares in close companies, a category into which many family companies fall, is different. Income from such shares is split in proportions reflecting actual ownership.

Children

Children are treated independently for tax purposes. If they have sufficient income to be liable to tax, they are treated as an adult would be treated, with their own personal allowance; basic rate tax band; savings band; and their own CGT annual exemption.

Working in the family business

To make use of the personal allowance, younger members of the family can sometimes be employed in the family business, subject to any relevant legal restrictions. Employment must be a reality, with payment only made where work is actually done, and the rate of payment being commercially justifiable. Attention to minimum wage rules is also needed.

Transfer of income producing assets

Where a child’s income is low, there may be some scope to transfer income producing assets to them, in order to use their personal allowance.

For optimal tax efficiency, consider who is best to make any such transfer, however. If provided by a parent, the income remains taxable on the parent if it exceeds £100 (gross) per tax year. This means that there is sometimes more scope for a grandparent or other relative to pass wealth to the next generation. In this case, the implications for IHT should also be taken into account.

Top tips for grandparents

IHT lifetime gifts: There were fears that Autumn Budget 2025 might chip away at the rules around IHT exemptions. This, however, did not happen, and there continue to be a number of measures that can be used to advantage in a family context. They are often used to enable grandparents to provide financial help to grandchildren in a tax efficient manner, and by reducing the value of the estate that sits above the £325,000 nil rate band, they also work to reduce any IHT due on death.

Areas to consider include use of the IHT annual exemption of £3,000; and other exemptions allowing small gifts of up to £250 per recipient; wedding gifts of up to £2,500 to a grandchild or great grandchild; and gifts made out of normal expenditure out of income. Gifts can also be exempt if made more than seven years before death.

Pension contributions: One way a lifetime gift can be structured is as a pension contribution for a grandchild. A pension can be set up from the child’s birth, and whilst only a parent or guardian can set the pension up, anyone can contribute thereafter. A contribution of up to £2,880 per year can be made. This automatically receives 20% tax relief, bringing the figure up to £3,600 per year.

Where the maximum figure is invested every year from birth to age 18, and then left to grow until the grandchild reaches retirement age, this could represent significant financial provision for the future.

In summary: Getting the IHT rules right is complex. As well as the implications for tax, it is important to take an all-round view, including the impact of gifts on the overall financial wealth of the donor. Please contact us to explore this further.

Use junior individual savings accounts (ISAs)

Junior ISAs are available for children under 18, who live in the UK. Parents, or guardians with parental responsibility, can open a Junior ISA for their children. The investment limit remains £9,000 per year.

Junior ISAs cannot be held at the same time as a child trust fund (CTF).

Management of the investment falls to the parent or guardian, but the money belongs to the child, who can take control of the account from age 16. No withdrawals can be made, however, until they turn 18. A Junior ISA will automatically change into an adult ISA when the child reaches this age. Those aged 16 or 17 can open their own Junior ISA.

Child trust funds

CTFs were set up for children born between 1 September 2002 and 2 January 2011, with an initial government deposit of at least £250. Matured CTFs are worth on average around £2,240, and when the owner turns 18, they can decide whether to withdraw or reinvest the money.

Lifetime ISAs

Parents or grandparents may want to consider gifting funds to adult children to invest in a lifetime ISA (LISA). LISAs can currently be used to buy a first home, or save for later life and can be opened between the ages of 18 and 40. The maximum investment limit is £4,000 per year. To this, the government adds a top-up of 25%, capped at £1,000.

Note that the government is about to consult on the introduction of a new, first time buyer only product that will provide a bonus when used to buy a house. It is expected that it will still be possible to open a LISA until such a product becomes available and for existing account holders to continue to save into their LISA in line with the existing rules indefinitely.

Where gift aid fits in

Gifts made under gift aid to charities or community amateur sports clubs have surprisingly tax efficient consequences.

They can be used as a planning tool, reducing taxable income for:

• The high income child benefit charge and tax-free childcare
• The personal allowance taper
• Generally, as a safeguard against being pushed into higher tax bands.

Claim higher rate relief

Those paying tax at higher rates can get a refund of the difference between the basic rate tax paid on the donation, and the higher rate they actually paid. This is something that becomes even more relevant with the current freeze on the personal allowance and key tax thresholds, which will take more taxpayers into higher rates of tax.

Getting the admin right

It is important to record all donations under gift aid. The date; the amount of the gift; and name of the recipient charity should be noted. A valid gift aid declaration must also be in place.

If one spouse pays tax at higher rates, and the other at basic rate, in order to benefit from enhanced relief, it should be the higher rate taxpayer who makes the gift aid declaration.

Timing is important

Where a donor is planning a significant donation to charity, and there is the likelihood that they will be paying tax at a higher rate next year, making the gift after 5 April 2026 can provide flexibility.

A gift made before 5 April 2026 can only be set off against 2025/26 income; but one made between 6 April 2026 and 31 January 2027 could be treated as made in either the 2025/26 or 2026/27 tax year.

The conditions to do this are strict. To treat such a gift as if made in 2025/26, a carry back election is needed. The donation must be paid, and the election made no later than 31 January 2027, and must be included in the 2025/26 tax return. The claim must be made in the tax return, and cannot be made in an amended return. The chance to make a carry back election is lost once a return is filed. This means advance planning is vital.

If this is of relevance to you, we can discuss the options and help you decide the best approach.