Upcoming rule changes will lead to higher bills for some UK taxpayers but the Treasury says it’s a ‘necessary’ step
British taxpayers are preparing for another financial blow. Changes to the personal allowance are drawing ever nearer – but officials say the changes are ‘necessary’ and ‘fair’.
Although the personal allowance threshold itself remains unchanged, staying frozen at £12,570 until 2031, a subtle shift will take effect from the next tax year. The government is introducing a new restriction on how it is applied, hitting investors and landlords particularly hard, reports City AM.
From April 2027, the personal allowance will be required to apply first to income from employment, self-employment and pensions, with any remaining allowance only then being applied to property income, savings interest and dividends. Under the existing system, HMRC rules dictate that the personal allowance must be allocated in the most tax-beneficial manner for the taxpayer, with no tax levied on income below £12,570.
This typically means offsetting the personal allowance against earned income first, but for those with savings and dividend income, the allowance is sometimes applied to other income streams instead. The rule change means the government will be capable of pushing more of taxpayers’ earnings into higher bands through dividends, property income and savings.
While the hit for taxpayers doesn’t lie within the rule change itself, it will interact with higher tax rates, which are also being brought in. For basic rate taxpayers, the rate for property and savings will surge two percentage points to 22 per cent from 20 per cent. Higher rate taxpayers will face an increase from 40 to 42 per cent, while additional rate taxpayers will see a rise from 45 per cent to 47 per cent.
In addition, a two percentage point increase has already been imposed on both basic rate taxpayers and higher rate taxpayers on dividend income. Basic rate taxpayers will now face a charge of 10.75 per cent, up from 8.75 per cent.
Higher rate taxpayers, earning between £50,271 and £125,140, will be hit with a 37.75 per cent charge, up from 35.75 per cent. Additional rate taxpayers will continue to bear a 39.35 per cent rate.
This means that when personal allowance is fixed to cover employment or pension income first, income taxed at standard rates will push more rental or investment income into higher bands. Under the 2027 regulations, a worker earning £30,000 with £15,000 in property income alongside £6,000 in savings and £2,000 in dividends, would find their personal allowance deducted solely from earned income.
This would result in a tax increase of approximately £676 per year, with £236 of that attributable to personal allowance restrictions. The changes to personal allowance are not the only modifications taxpayers will encounter from the 2027/28 tax year, including a significant shake-up to estate planning.
Inheritance tax changes
Remaining pension funds left upon death will become liable for inheritance tax (IHT), along with lump sums from defined benefit pensions. This means the funds will become part of an individual’s estate and be liable to IHT of up to 40 per cent, depending on other assets and the application of nil rate band.
After IHT has been settled, any pension withdrawals will be subject to income tax at the beneficiary’s marginal rate if the deceased was aged 75 or over.
The cash ISA limit will also be reduced from £20,000 to £12,000 for those under 65, while stocks and shares ISAs will retain the £20,000 limit.
A Treasury spokesperson said: “We have the right economic plan – the fair and necessary decisions we made at the Budget mean we can deliver support for families and businesses, including cutting the cost of living. We are taking action to ensure income from assets is taxed more fairly, narrowing the gap with tax paid on work.
“Most taxpayers have no taxable savings or property income and ISAs, and tax-free allowances will continue to protect those with small amounts of income from assets.”
