Advanced Taxation (UK) · Legitimate tax planning measures

Income Tax Planning: Rates, Bands and the Reliefs Cap

Updated 11 October 2026 · Fact-checked

Income tax planning means arranging income so more of it is taxed at low or nil rates. You use each person's personal allowance, basic rate band, savings and dividend nil rate bands, and transfer income-producing assets between spouses. You also check that relief claims stay within the cap of the higher of £50,000 or 25% of income.

Understand Income Tax Planning: Rates, Bands and Reliefs Cap

Income tax is charged on each individual separately. Everyone has their own personal allowance, their own bands and their own nil rate bands. Planning starts from this: if one spouse pays 33.75% on dividends and the other pays little or nothing, moving income to the lower-taxed spouse saves tax.

Income is taxed in a fixed order: non-savings income first (employment, trading, property), then savings income, then dividends. The personal allowance is set against non-savings income first. The bands then fill in the same order. So a salary can push dividends into a higher band, and a loss of band space can waste a nil rate band.

There are three layers of low-rate treatment. The starting rate for savings is 0% on savings income within the first £5,000 of taxable income, so it only helps where non-savings taxable income is small. The savings nil rate band is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. The dividend nil rate band is £500 for everyone. Nil rate band income still uses up the basic rate band.

The personal allowance is £12,570. It is reduced when adjusted net income exceeds £100,000 and is zero at £125,140 or more. Income between £100,000 and £125,140 therefore suffers a very high effective marginal rate. Planning here, for example pension contributions or moving income to a spouse, can be very valuable.

The cap on income tax reliefs limits certain reliefs set against general income. Unless otherwise restricted, they are capped at the higher of £50,000 or 25% of income. It matters mainly for sideways loss relief and similar claims. Any excess is usually not lost but carried forward under the rules of that relief. In the exam, planning advice should also mention the risks: gifts must be outright and genuine, and the anti-avoidance rules can apply to arrangements that are not.

Key rules to remember

Income tax rates and bands (normal): Basic £1 - £37,700: 20%; Higher £37,701 - £125,140: 40%; Additional over £125,140: 45%; Bands apply to taxable income, after the personal allowance. Given in the exam tax tables.
Dividend rates: Basic 8.75%; Higher 33.75%; Additional 39.35%; Dividend nil rate band of £500 is taxed at 0% but uses up band space.
Savings nil rate band: Basic rate taxpayer £1,000; higher rate taxpayer £500; Starting rate of 0% on savings income within the first £5,000 of taxable income.
Order of income: Non-savings, then savings, then dividends; Allowances and bands are used in this order, so dividends are taxed at the top.
Personal allowance: £12,570; reduced where adjusted net income exceeds £100,000; zero at £125,140 or more; Reduction is £1 for every £2 of income over £100,000, so full loss happens at £125,140 with a £12,570 allowance.
Marriage allowance transferable amount: £1,260; Only available where the recipient is not a higher or additional rate taxpayer. Check the conditions in the question.
Cap on income tax reliefs: Cap = higher of £50,000 and 25% × income; Applies unless the relief is otherwise restricted. Not every relief is within the cap, so check which reliefs are.

How to solve Income Tax Planning: Rates, Bands and Reliefs Cap questions

Use this method for any question asking you to reduce income tax or compare two arrangements.

1Identify each taxpayer and list their income by type: non-savings, savings and dividends. Note the personal allowance position and whether income is near £100,000 or £125,140.
2Compute the current tax for each person in the correct order: personal allowance against non-savings first, then fill the bands with non-savings, savings and dividends.
3Spot the waste: unused personal allowance, unused basic rate band, unused savings or dividend nil rate bands, or a higher rate spouse holding income that a lower-rate spouse could hold.
4Choose the planning measure: transfer income-producing assets outright, change the mix of salary and dividends, or use a relief within the cap.
5Recompute tax after the change, using the same layout. Show the saving as a clear figure.
6For any relief claimed, test the cap: the higher of £50,000 or 25% of income. Restrict the relief if needed and state what happens to the excess.
7Add the practical points: the gift must be outright, other taxes may be affected (NIC, CGT, IHT) and anti-avoidance rules may apply. Conclude with a recommendation.

Quickest way: Compare taxable income layer by layer

When to use it: Use when you have limited time and need a quick comparison of two people or two options.

Write one column per person. Deduct the personal allowance from non-savings income first.
Slot the income into the bands in order and apply nil rate bands to the first £1,000/£500 of savings and the first £500 of dividends within the bands.
Apply the rates by band to each layer. Dividends use dividend rates, not 20/40/45.
Only compute the difference between the options if the question allows; otherwise show full tax for both.
Check the cap with one line: 25% × income against £50,000, take the higher.

Common mistakes in Income Tax Planning: Rates, Bands and Reliefs Cap

Applying 20%, 40% and 45% to dividends
Students use the normal rates because they are listed first in the tax tables.
Fix: Use the dividend rates of 8.75%, 33.75% and 39.35% for dividends. Savings use the normal rates.
Treating the nil rate bands as extra band space
Nil rate band income is taxed at 0%, so it seems to sit outside the bands.
Fix: Nil rate band income still uses up the basic rate band. It only changes the rate on that slice.
Ignoring the loss of the personal allowance between £100,000 and £125,140
Students look only at the 40% band and miss the allowance reduction.
Fix: Check adjusted net income. In this range, reducing income by £1 can save tax on that £1 and restore allowance. Show the effect.
Forgetting the order of income when the starting rate for savings applies
Students apply the £5,000 starting rate to total income instead of taxable income.
Fix: The 0% starting rate applies only to savings income falling within the first £5,000 of taxable income. Non-savings taxable income uses that space first.
Applying the cap to every relief or using the wrong figure
The cap rule is learnt as a single number, £50,000.
Fix: Use the higher of £50,000 or 25% of income. Remember it applies unless the relief is otherwise restricted, and check that the relief in the question is one that falls within it.
Recommending a spouse transfer without conditions
Students focus on the saving and not on how the transfer works.
Fix: State that the gift must be outright and unconditional, with the income belonging to the spouse. Mention that a sham arrangement or one with strings attached may be challenged.

Worked examples

Example 1

Alan is a higher rate taxpayer with substantial salary. He holds shares that pay dividends of £20,000 a year. His wife Beth has no other income. Explain and quantify the income tax saving if Alan gives the shares to Beth outright. Use 2025/26 rates.

Show the solution

Alan's position: all dividends fall in the higher rate band. The first £500 is covered by the dividend nil rate band at 0%.
Alan's tax: (£20,000 - £500) = £19,500 × 33.75% = £6,581.
Beth's position: dividends of £20,000 are her only income. Her personal allowance of £12,570 is set against them, leaving taxable dividends of £7,430.
Beth's taxable dividends fall within the basic rate band. The first £500 is at the nil rate. Tax: (£7,430 - £500) = £6,930 × 8.75% = £606.
Saving: £6,581 - £606 = £5,975 a year.
Conditions: the gift must be outright, with Beth owning the shares and the dividends. Gifts between spouses living together are a no gain, no loss disposal for capital gains tax. Mention that Beth would then also benefit from her own personal allowance, which would otherwise be wasted.

Answer: Alan's dividend tax is £6,581 now. Beth would pay £606. The annual saving is £5,975, provided the gift is outright and genuine.

Example 2

In 2025/26 Chris has employment income of £140,000. He also made a trading loss of £90,000 in his sole trade, which he wants to set against his general income. Calculate the maximum loss relief allowed after the cap on income tax reliefs and the tax saving. Assume no other income or reliefs. Use 2025/26 rates.

Show the solution

Cap: the higher of £50,000 or 25% × £140,000 = £35,000. The higher is £50,000.
Relief claimed is limited to £50,000. The remaining £40,000 (£90,000 - £50,000) is not relieved against general income this year. It is normally carried forward against future profits of the same trade.
Tax before relief: personal allowance is nil because income is above £125,140. Taxable income £140,000. Basic: £37,700 × 20% = £7,540. Higher: (£125,140 - £37,700) = £87,440 × 40% = £34,976. Additional: (£140,000 - £125,140) = £14,860 × 45% = £6,687. Total £49,203.
Tax after relief: income £140,000 - £50,000 = £90,000. The personal allowance of £12,570 is now available as income is below £100,000. Taxable income £77,430. Basic: £37,700 × 20% = £7,540. Higher: (£77,430 - £37,700) = £39,730 × 40% = £15,892. Total £23,432.
Saving: £49,203 - £23,432 = £25,771. Part of the saving arises because the relief restores the personal allowance.

Answer: Maximum relief is £50,000, with £40,000 unrelieved this year. Tax falls from £49,203 to £23,432, a saving of £25,771.

Exam tips

Show each person's computation in a clear layout, with non-savings, savings and dividends on separate lines. Marks are given for method even if one figure is wrong.
Quote the rates from the tax tables provided, and use the dividend rates for dividends. Do not rely on memory for band limits.
In planning questions, state the recommendation, the saving, and the risks or conditions. Professional skills marks reward a clear, reasoned recommendation addressed to the client.
Check for traps: income near £100,000, savings with little non-savings income (starting rate), and a loss claim that hits the cap.
Calculations only need to be made to the nearest £, and all workings should be shown. Follow the supplementary instructions in the exam.

Practice questions from Legitimate tax planning measures

Income Tax Planning: Rates, Bands and Reliefs Cap in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Applied SkillsCap on Income Tax Reliefs

Income Tax Planning: Rates, Bands and Reliefs Cap: frequently asked questions

What is the cap on income tax reliefs?

It limits certain reliefs set against general income to the higher of £50,000 or 25% of income, unless otherwise restricted. You compute both figures and take the higher. Check whether the relief in the question is subject to the cap.

How do spouse transfers reduce income tax?

Each spouse has their own personal allowance, bands and nil rate bands. Giving income-producing assets outright to a spouse with lower income means the income is taxed at lower rates. The gift must be genuine and unconditional.

Does the dividend nil rate band increase my basic rate band?

No. The £500 dividend nil rate band taxes that slice of dividends at 0%, but it still uses up part of your basic or higher rate band. This can push other income into a higher band.

When does the savings starting rate apply?

A 0% rate applies to savings income that falls within the first £5,000 of taxable income. It is only useful where non-savings taxable income is low, because non-savings income uses up that space first.