Income tax update
Contributed by Jo Lawless FCA CTA, Senior Technical Writer, Croner Ltd
Over this and the next tax year, UK taxpayers face increasing rates of tax on investment income, frozen rates and allowances and a change in how allowances and reliefs can be used.
Personal allowance and income tax bands
Personal allowances and rate bands in England and Wales were already frozen until the start of 2028–29, and the Autumn Budget 2025 extended that freeze until 2030–31. This means that by the time we reach the 2031–32 tax year, these will not have changed significantly for a decade. Therefore the allowance and tax bands remain as follows:- personal allowance: £12,570;
- basic rate band: first £37,700 of taxable income;
- higher rate band: taxable income between £37,700 and £125,140; and
- additional rate: taxable income above £125,140.
Scotland sets its own rate bands for Scottish taxpayers for income that is not savings or dividend income, and from 6 April 2026 they are as follows:
- starter rate on taxable income up to £3,967;
- basic rate on taxable income above £3,967 and up to £16,956;
- intermediate rate on taxable income above £16,956 up to £31,092;
- higher rate on taxable income above £31,092 up to £62,430;
- advanced rate on taxable income above £62,430 up to £125,140; and
- additional rate on income above £125,140.
The rates in Scotland have not been amended for 2026–27.
Dividend tax rates
From the start of the 2026–27 tax year, the ordinary and upper rates of tax on dividend income have increased by 2% to 10.75% and 35.75% respectively. The additional dividend rate has not changed and remains at 39.35% (meaning the trust dividend rate also remains unchanged).
The dividend nil rate (or dividend allowance) also remains unchanged at £500 per person for the tax year.
For business owners looking to extract profit efficiently, it remains more tax efficient for smaller amounts (up to approximately £139,000) to take a salary to use the personal allowance and dividends for the remainder. Noting that a detailed calculation needs to be undertaken for each individual as marginal rates of tax can vary where the individual is subject to the high income child benefit charge or has student loans, for example.
Other rate changes in 2027–28
For now the savings rates of income tax remain the same, but from 6 April 2027, the rate on savings income will increase by 2% to 22%, 42% and 47% for basic, higher and additional rate tax payers respectively. The starter rate on savings (0%) and the savings nil rate or ‘personal savings allowance’ (£1,000 for a basic rate tax payer and £500 for a higher rate tax payer) are to remain the same in 2026–27 and 2027–28.
From 2027–28, there will be separate rates of income tax for property income, also set at 22%, 42% and 47% for the property basic, higher and additional rate respectively. The Scottish and Welsh Governments will have the ability to set their own rates for property income.
For those landlords claiming relief for finance costs, from 2027–28 this will be given at the property basic rate of 22%.
Property income is defined as:
- profits of a UK or overseas property business;
- any adjustment income when moving to or from the cash basis;
- rent receivable in connection with mineral royalties;
- rent receivable for UK electric line wayleaves; and
- post-cessation receipts from a UK property business.
The property allowance of £1,000 will remain unchanged in 2026–27 and 2027–28.
The changes to the tax rates on savings and property will mean that from 6 April 2027, there will be four trust tax rates:
(1)the trust rate – 45%;
(2)the property trust rate – 47%;
(3)the savings trust rate – 47%; and
(4)the dividend trust rate – 39.35%.
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Income ordering rules and use of reliefs and allowances
Alongside the introduction of the new property income rates of tax from 6 April 2027, there will be a change to the income ordering rules. From that date, income will be taxed in the following order:
- income which is not property, savings or dividend income; then
- property income; then
- savings income; then
- dividend income.
Currently, any allowances or reliefs (subject to some reliefs only being able to be offset against certain types of income) may be deducted from income in such a way that will result in the greatest reduction in the income tax liability of an individual.
From 2027–28, any reliefs and allowances will need to be deducted:
(1)first from income which is not property, savings or dividend income, before they can be
(2)deducted from property, savings or dividend income.
Again, this is subject to any restrictions on how the allowances or reliefs may be used.
Any remaining allowances or reliefs (after point (1) above) can then be used against property, savings or dividend income in such a way that achieves the greatest reduction in income tax.
Making tax digital for income tax (MTD for IT)
The use of MTD for IT is mandatory from 6 April 2026, for those individuals with gross business income (from self-employment or property) of more than £50,000. That threshold is reduced to £30,000 from 6 April 2027 and £20,000 from 6 April 2028.
Those taxpayers affected must:
- keep records of income and expenditure digitally;
- submit quarterly updates on each self-employment and property business using an MTD compatible software; and
- submit a final MTD tax return for the year.
There are several exemptions to the requirement to use MTD for IT; some are temporary and some will apply indefinitely.
There are also new penalty regimes – notably for late filing of returns, and late payment of tax – for those within MTD for IT from April 2026 onwards. It appears that these will be rolled out to non-MTD self-assessment taxpayers from April 2027 onwards.
Conclusion
For those individuals who are business owners, or receive significant income from savings or investments, remuneration and income tax planning is key in order to manage the changes to rates and offset of reliefs.
Useful links
For commentary on MTD for ITSA, see Direct Tax In-Depth at ¶180-300A onwards, and for rates of income tax, see ¶148-060.
Legislation: FA 2026, s. 1–10 , Sch. 1 and Sch. 2 .
Navigate Tax module: Extracting profits from OMBs.
