Some taxpayers will face an extra £182 each year because of changes to how the personal allowance works.
The change will start next year and will affect some investors and landlords by pushing more of their income into higher tax brackets.
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Right now HMRC rules say that the personal allowance must be used in whatever way saves the taxpayer the most money. You pay no tax on income below this threshold of £12,570.
This usually means taking the personal allowance off your earned income first. But for people who also have savings & dividend income it sometimes makes more sense to use the personal allowance against those other income sources instead.
HMRC should do this automatically but taxpayers can also request the department to allocate the personal allowance in the most efficient way. The Government announced in the November Budget that from 2027 the personal allowance must be taken off employment income or trading income or pension income first. This rule change means the Government will push more of taxpayers’ income into higher tax rates on dividends and property income and savings.
For example a worker earning £29,775 with £15000 in property income and £5,715 in savings income & £1,885 in dividend income could ask HMRC to allocate £7,075 of their personal allowance against their earnings & £5,215 against their savings income & £280 against their dividend income.
This would save them from paying tax on their savings and reduce the amount of dividend income liable for tax. Their total tax bill would be £7913 according to accountancy firm Blick Rothenberg. But from 2027 once the higher tax rates have started the personal allowance would be deducted only from their earned income and they would face a £614 tax rise. Of this amount £182 would be solely from the personal allowance restriction and the rest from higher tax rates.
Tom Goddard of Blick Rothenberg said the changes are just another tax increase contributing to the highest post-war tax burden. He said the Government is trying to raise revenue without increasing tax for the working population. However the changes will likely discourage saving outside ISAs and pensions and lead to increases in rent for tenants.
The changes will likely be felt most by those individuals who are asset-rich but cash-poor. Chris Etherington of accountancy firm RSM said that while many may be unaware of this change they may not be surprised that there is an extra tax squeeze in store for those with income from savings and rental properties. It may be presented as a technical tweak to the rules but it might ultimately be seen by taxpayers as a further stealth tax rise.
In 2029-30 around two thirds of the revenue from the increases to the dividend & property and savings tax rates is expected to come from the top 20 percent of households according to government forecasts.
A Treasury spokesman said they have the right economic plan and the fair and necessary decisions made at the Budget mean they can deliver support for families and businesses including cutting the cost of living.
They are taking action to ensure income from assets is taxed more fairly and narrowing the gap with tax paid on work.
\Most taxpayers have no taxable savings or property income & ISAs & tax-free allowances will continue to be available.
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