We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
Changes aim to narrow the gap between tax paid on income from employment and income from assets
The government has announced a package of tax changes aimed at narrowing the gap between the tax paid on income from employment and the tax paid on income from assets. Ministers argue that individuals who earn income from property, savings or dividends currently contribute less than those whose income comes from work, because they do not pay national insurance on those sources.
To address this imbalance and ensure a fairer system, the government is introducing higher tax rates on asset-based income streams.
Dividend income
From April 2026, dividend tax rates will increase by two percentage points, with the:
- ordinary rate rising from 8.75% to 10.75%
- upper rate rising from 33.75% to 35.75%
- additional rate remaining at 39.35%.
All dividends received on assets held within an Individual Savings Accounts (ISA) are entirely tax free. Dividends received within a Self-Invested Personal Pension (often called a SIPP) or by registered pension schemes are also tax free. Dividends received on investments outside of tax-advantaged wrappers like these are subject to income tax.
All taxpayers benefit from a dividend allowance which allows individuals to earn up to £500 of dividend income each tax year outside of an ISA without paying tax on it, in addition to the personal allowance of £12,570.
Savings income
From April 2027, tax rates on savings income will also rise by two percentage points, increasing from:
- ·20% to 22% (basic rate)
- 40% to 42% (higher rate)
- 45% to 47% (additional rate).
Individuals are not taxed on the money they save, but some will pay tax on the interest income they earn from their savings depending on their circumstances. Savings interest income is what a financial institution pays you for depositing your money with them, typically calculated as a percentage of the amount you have saved.
All interest received on assets held within ISAs is entirely tax free.
Lower earners benefit from the starting rate for savings and can receive up to a further £5,000 on top of their personal allowance without paying tax. If your taxable income not from savings or dividends is less than £17,570 the government provides a starting rate for savings, which is a 0% tax rate that allows individuals to receive up to £5,000 of interest tax free.
Most UK taxpayers are also entitled to a personal savings allowance, on top of their standard personal allowance of £12,570, which allows individuals to earn a certain amount of savings income each tax year outside of an ISA without paying tax. Basic rate taxpayers can receive £1,000 of interest without paying tax, and higher rate taxpayers can receive £500 without paying tax.
Property income
Property income will move to its own dedicated tax banding. From April 2027, separate rates for property income will be introduced:
- 22% (property basic rate)
- 42% (property higher rate)
- 47% (property additional rate).
Finance cost relief for unincorporated landlords will apply at the new property basic rate (22%).
There are a number of allowances and reliefs, in addition to your personal allowance, to help reduce your income tax liability on this kind of income.
Property income of less than £1,000 does not need to be reported to HMRC and is tax free. If a landlord has annual gross property income of more than £1,000 they can benefit from either using the tax-free £1,000 property allowance or deducting relevant expenses.
The government also provides the Rent a Room Scheme, which lets individuals earn up to a threshold of £7,500 per year tax free from letting out furnished accommodation in their home (£3,750 for joint lettings). Additionally, finance cost relief (FCR) provides unincorporated landlords income tax relief at the basic rate on their mortgage interest costs. Finance cost relief will be provided at the separate property basic rate (22%).
Ministers emphasise that over 90% of UK taxpayers do not have taxable savings, property or dividend income, and therefore will not be affected by these reforms.