Advanced Taxation (UK) · Mitigation of tax by numerical analysis and reasoned argument

Income Tax Planning: Rates, Bands and Dividend Rates

Updated 11 October 2026 · Fact-checked

Income tax planning in ATX-UK means arranging income so more of it falls in nil rate bands, the basic rate band or an unused personal allowance. Stack income in order (non-savings, savings, dividends), apply the right rates, compare options in pounds, then add non-tax factors. Check the cap on income tax reliefs.

Understand Income Tax Planning: Rates, Bands and Dividend Rates

Income tax is not one rate on one pot. UK income is split into non-savings income (earnings, trading profit, property), savings income (interest) and dividend income. Each type has its own rates, and they are stacked in that order: non-savings first, then savings, then dividends on top.

The tax tables give the bands. The basic rate band is £37,700, the higher rate band runs to £125,140 and the additional rate applies above that. Normal rates are 20%, 40% and 45%. Dividend rates are lower: 8.75%, 33.75% and 39.35%. Savings income uses the normal rates. Because dividends sit on top, they are often taxed at the higher dividend rates even when the salary is modest.

Three nil rate slices matter for planning. The dividend nil rate band is £500 for everyone. The savings income nil rate band is £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer, and it is £0 for an additional rate taxpayer. A starting rate of 0% applies to savings income that falls within the first £5,000 of taxable income, so it only helps if non-savings taxable income is low. Income in a nil rate band still uses up the band it sits in. It is taxed at 0%, not ignored.

Planning means moving income to where it is taxed less. You can shift income to a spouse or civil partner with unused allowances or lower bands. You can choose between salary and dividends. You can use reliefs to pull income down into a lower band. Be careful with income between £100,000 and £125,140, where the personal allowance is withdrawn and the effective rate is high.

The cap on income tax reliefs limits certain unlimited reliefs. Unless otherwise restricted, they are capped at the higher of £50,000 or 25% of income. Always check it when a question gives large reliefs such as loan interest or trade loss relief against general income. It does not affect pension contributions or Gift Aid.

Key rules to remember

Normal rates: Basic £1 to £37,700: 20% | Higher £37,701 to £125,140: 40% | Additional over £125,140: 45%; Apply to non-savings and savings income. The bands are on taxable income, after the personal allowance.
Dividend rates: Basic 8.75% | Higher 33.75% | Additional 39.35%; Dividends are taxed last, so they fall in the highest band reached.
Dividend nil rate band: £500 at 0%; Available to all taxpayers. Dividends in it still use up band capacity.
Savings income nil rate band: Basic rate taxpayer £1,000 | Higher rate taxpayer £500 | Additional rate £0; The level depends on which band your total taxable income reaches.
Starting rate for savings: 0% on savings income within the first £5,000 of taxable income; Reduced pound for pound by non-savings taxable income. Nil if that income is £5,000 or more.
Order of income: Non-savings, then savings, then dividends; Personal allowance is set against non-savings income first.
Cap on income tax reliefs: Higher of £50,000 or 25% of income; Applies unless otherwise restricted. It does not apply to pension contributions or Gift Aid.
Tax saved by a planning step: Tax before − tax after; Always show both computations, then the saving.

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

Use this method for any question that asks you to minimise income tax or compare two ways of taking income.

1Read the requirement and note who is being advised. Identify each person's income by type: non-savings, savings and dividends.
2Check the personal allowance for each person. Note anyone with unused allowance or low income, and anyone with income near £100,000.
3Set out the base position: taxable income, bands used, and tax. Stack non-savings, then savings, then dividends.
4Apply the nil rate bands correctly: the £500 dividend nil rate band, the savings nil rate band (by taxpayer type) and the starting rate if non-savings taxable income is under £5,000.
5Compute the alternative (for example, dividend instead of bonus, or income moved to a spouse). Use the same layout so the comparison is clear.
6Compare the totals and state the saving in pounds. Show every working, because workings earn marks.
7Check the cap on income tax reliefs if large reliefs are involved. Then add non-tax points: the gift must be outright, NIC and corporation tax effects, cash flow and commercial reality.
8Finish with a clear recommendation in the form asked for, such as a letter, a memo or bullet points.

Quickest way: Marginal band check

When to use it: Use it when the question is a simple choice between two ways to receive extra income and you only need the extra tax.

Work out where the person's taxable income sits before the extra income: basic, higher or additional band, and how much of the band remains.
Split the extra income by band. Apply 0% to any part that fits inside a nil rate band.
Apply the correct rate type: normal rates for salary, interest and profits, dividend rates for dividends.
Add the tax on each slice. Compare options.
Then do a quick full computation as a check if time allows.

Common mistakes in Income Tax Planning: Rates, Bands and Dividend Rates

Taxing dividends at 20%, 40% and 45%.
Students use the normal rates for all income types.
Fix: Use 8.75%, 33.75% and 39.35% for dividends. Label each income type before applying rates.
Ignoring that nil rate band income still uses up the basic rate band.
Students think 0% income is outside the bands.
Fix: Include the £500 dividend nil rate band and the savings nil rate band in the band calculation. They push later income into higher bands.
Giving a higher rate taxpayer a £1,000 savings nil rate band, or giving an additional rate taxpayer any.
Students forget the level depends on the band reached.
Fix: Decide the taxpayer type first: £1,000 basic, £500 higher, nil additional.
Using the starting rate for savings when salary is high.
Students see the £5,000 figure and apply it without checking non-savings income.
Fix: The starting rate only covers savings within the first £5,000 of taxable income. If non-savings taxable income is £5,000 or more, none is available.
Forgetting the cap on income tax reliefs.
Students focus on the relief and not the limit.
Fix: Whenever a large relief is deducted from general income, test it against the higher of £50,000 or 25% of income.
Recommending a spouse transfer without conditions.
Students focus on the tax rate difference only.
Fix: State that the gift must be outright and unconditional, with no strings attached. Mention that the spouse must really own the income source.

Worked examples

Example 1

Anil owns his company and already receives a salary of £30,000 from it. He wants £20,000 more income this year. Compare taking it as a dividend or as extra salary, considering income tax only. Assume a personal allowance of £12,570. Ignore national insurance and corporation tax.

Show the solution

Option 1, dividend. Non-savings income is £30,000. Less personal allowance £12,570 gives taxable non-savings income of £17,430.
Dividend income is £20,000. Total taxable income is £17,430 + £20,000 = £37,430, which is below £37,700, so everything is taxed in the basic rate band.
Tax on non-savings income: £17,430 × 20% = £3,486.
Tax on dividends: £500 × 0% = £0, then £19,500 × 8.75% = £1,706.25. Total tax for Option 1 is £3,486 + £1,706.25 = £5,192.25, about £5,192.
Option 2, extra salary. Total salary is £50,000. Less personal allowance gives taxable income of £37,430, all non-savings and all in the basic rate band.
Tax: £37,430 × 20% = £7,486.
Saving from a dividend: £7,486 − £5,192.25 = £2,293.75, about £2,294.
Check: extra tax on salary is £20,000 × 20% = £4,000. Extra tax on the dividend is £1,706.25. The difference is £2,293.75.

Answer: A dividend saves Anil about £2,294 of income tax compared with extra salary. Before recommending it, also compare the employer and employee national insurance on a bonus, and note the company gets no corporation tax deduction for a dividend.

Example 2

Ben earns a salary of £80,000 and has a building society account producing £6,000 of interest a year. His wife Clara has no income. Both are UK resident. Advise on income tax planning and quantify the saving if Ben gives the account to Clara. Assume a personal allowance of £12,570 for each.

Show the solution

Ben's position. Salary £80,000 less personal allowance £12,570 gives taxable non-savings income of £67,430. The personal allowance is not restricted because his income is below £100,000.
Ben's interest of £6,000 is taxed on top. His taxable income is above £37,700 so he is a higher rate taxpayer. The savings nil rate band is £500.
Tax on interest: £500 × 0% = £0, then £5,500 × 40% = £2,200. The starting rate is not available because his non-savings taxable income is well above £5,000.
Clara's position if she owns the account. Her only income is £6,000 of interest, which is below her £12,570 personal allowance. Her taxable income is nil and her tax on the interest is £0.
The saving is £2,200 a year. Ben's other tax is unchanged.
Conditions: the gift must be outright and unconditional, so Clara has full control of the account and the interest. A gift between spouses who are living together is not a chargeable disposal for capital gains tax, and it is an exempt transfer for inheritance tax, so those taxes are not an issue for cash.

Answer: Transferring the account to Clara saves £2,200 of income tax each year, because her unused personal allowance covers all of the interest. The gift must be outright and unconditional and Clara must genuinely own the account.

Exam tips

Write out each person's income under three headings: non-savings, savings and dividends. This avoids rate errors and shows structure to the marker.
Always show both computations and the saving. A recommendation without numbers loses technical marks.
Learn the nil rate band amounts and the three dividend rates from the tax tables, but know where to find them quickly. You have them in the exam.
Add commercial points for the professional skills marks: the spouse must really own the asset, NIC and corporation tax differ between salary and dividends, and the client may need cash now.
If a question gives large reliefs, check the cap on income tax reliefs before computing tax.

Practice questions from Mitigation of tax by numerical analysis and reasoned argument

Income Tax Planning: Rates, Bands and Dividend Rates 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 SkillsIncome Tax Rates, Bands and Order of Taxation

Income Tax Planning: Rates, Bands and Dividend Rates: frequently asked questions

Why are dividends often better than salary for income tax?

Dividend rates are 8.75%, 33.75% and 39.35%, which are below the normal rates of 20%, 40% and 45%. There is also a £500 dividend nil rate band. Always check NIC and corporation tax as well, because a salary is deductible for the company and a dividend is not.

How does the savings income nil rate band work?

It is £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer. There is none for an additional rate taxpayer. The amount depends on your taxable income and which band it reaches. The starting rate for savings is separate and gives 0% on savings within the first £5,000 of taxable income.

What is the cap on income tax reliefs?

Unless otherwise restricted, certain reliefs are capped at the higher of £50,000 or 25% of income. It limits unlimited reliefs deducted from general income. Pension contributions and Gift Aid are not affected.

How can spouse transfers save income tax?

If one spouse has unused personal allowance or is in a lower band, moving income-producing assets to them can reduce the couple's total tax. The transfer must be an outright, unconditional gift. State this condition in your answer.