Tax On Property Income, Dividends And Savings Up 2%

Tax rates on dividends, property income and savings will be raised by 2% from April 6, 2027. This means those paying tax on rental income, will face a basic rate of 22%, rather than the usual 20%; 42% for higher rate taxpayers instead of 40%, and 47% for additional rate taxpayers, up from the usual 45%.

The Rent a Room Allowance is unchanged, and any carried forward property losses must still be offset against property income. Relief for residential property costs will also be calculated at 22% when the rate changes.

When calculating income tax allowances or reliefs, these will be applied first to income that is not generated from property, savings or dividend income. If the allowances or reliefs exceed this type of income, they will then be deducted from these other types of income in the way that is most beneficial for the taxpayer, according to the Budget documents.

What are the new savings and dividend tax rates?

The rates of income tax on savings will follow the pattern of property income tax, at 22%, 42% and 47% for the basic, higher and additional rate taxpayers respectively. The way they are applied will become a little more complicated, as the starting rate for savings income is 0% up to £5,000 for those taxpayers with income up to £17,570 that is not from savings, dividends or property.

The Personal Savings Allowance gives a 0% tax rate on income up to £1,000 for basic rate taxpayers and up to £500 for higher rate taxpayers. These will also apply from April 6, 2027. The new dividend tax rates will apply earlier, from April 6, 2026, and from that date they will also rise by 2 percentage points. This will put the dividend ordinary rate at 10.75%, the dividend upper rate at 35.75% and the dividend additional rate at 39.35%.

The Budget documents added that the “rate charged to companies under the loans to participators regime is automatically tied to the dividend upper rate and so will also increase to 35.75%”. The dividend allowance will stay at £500.

Claire Trott, Head of Advice at St. James’s Place, said: “Raising dividend, property and savings taxes by 2% only adds further layers to an already overly complicated tax system. Many individuals will now need to rethink how they structure their holdings to remain tax efficient. The justification provided that an extra 2% brings these taxes more in line with the NICs paid on earned income overlooks the fact that business owners are likely to feel the greatest impact, particularly those already affected by earlier NICs increases.

“We now have three separate tests on pension contributions: the annual allowance, the limit on income tax relief, and the new limit on NICs savings. At the same time, income is taxed at different rates depending on whether it is earned, from property, from savings, or from dividends. Layered on top are multiple allowances, many of which taper away as frozen thresholds pull more people into higher tax brackets.”

How do you work out what you need to pay?

Understanding what you need to pay and how each element of the allowances and changes are applied is definitely more complicated than it was. The new, separate rate for property income, will be taxed “after employment, trading and other income but before savings and dividend income”, according to the Budget documents.

Working out your liabilities will be more complicated, and it would be wise to speak to your accountant if you have any uncertainty about what you might need to pay when the new regime is in place.

The Budget documents include an example tax calculation which may help to explain how this new system will work when all new tax rates are in place:

In the tax year the individual has following income:

• employment income (£30,000)
• property income from residential letting (£3,000 share of profit)
• finance cost relief for a rental property (£1,000 share of interest expense)
• interest on savings of £400
• dividend income of £200

The personal allowance and rate bands are unchanged.

Amounts of taxable income after steps one to three:

• personal allowance must be set off against employment income first. Employment income: £30,000 – £12,570 = £17,430

Amounts of Income Tax calculated at step 4 (employment first, then property):

• employment income: £17,430 at 20% = £3,486
• property income: £3,000 at 22% = £660
• savings income: £400 at 0% = £0 (Personal Savings Allowance)
• dividend Income: £200 at 0% = £0 (Dividend Allowance)

Total tax due (step 5):

• employment income (BR): £3,486
• property income (BR): £660
• total tax due: £4,146

Finance cost relief tax reduction at step 6:

£1,000 at 22% = £220

No additional tax charge at step 7.

Total Income Tax due: £4,146 – £220 = £3,926

Source: Gov.uk

We can help you

These changes are a lot to take in, and will increase the complexity of your taxes if you have these various types of income. If you need help unpicking all of this, then please contact us and we will do everything we can to assist you.