Income tax is going to get even more complicated!

Kevin Read looks at the income tax rises coming in April 2027. At the November 2025 Budget, the Chancellor announced an increase in the tax rates applicable to income from property businesses and savings, which will apply from 6 April 2027.

On the horizon…

The basic, higher and additional rates on rental and savings income will all rise by two percentage points in 2027/28, to 22%, 42% and 47% respectively. These increases were legislated in the Finance Act 2026. Where residential property is being let, finance costs (e.g., mortgage payments) are not treated as a deductible expense when calculating the taxable profits. However, a basic rate ‘tax reducer’ is given on the disallowed finance costs. This tax rate will increase to 22% from 6 April 2027.

There will also be new rules about the order in which certain amounts are deducted from income. Reliefs and allowances deductible at steps 2 and 3 of the income tax calculation in ITA 2007, s 23 will be applied to other sources of income in priority to property, savings and dividend income. Step 2 includes, inter alia, deductions for trade loss reliefs, qualifying interest payments and gifts of quoted shares (and land) to UK charities.

Step 3 includes the personal allowance and the blind person’s allowance. Property income will be treated as the top slice of non-savings, non-dividend income, coming before savings income (if there is any) and then dividend income.

Scottish and Welsh taxpayers

While savings and dividend tax rates apply across the whole of the UK, the Scottish Government and Welsh Assembly can vary the rates of tax on non- savings, non-dividend income (although this has not yet happened in Wales). It remains to be seen if either legislative body will increase its property income tax rate to be in line with the rest of the UK from 6 April 2027. Example: Michelle has a mix of income in 2027/28. Michelle has a salary of £36,000, dividends of £15,000 and residential property income of £38,000 (before mortgage interest of £14,900). She is an English taxpayer.

Her tax calculation is as follows.

Income £
Salary 36,000
Property income 38,000
Dividends 15,000
Less personal allowance (12,570)
Net taxable income 76,430
Tax calculation £
(36,000-12,570 =) 23,430 @ 20% 4,686
14,270 @ 22% 3,139
23,730 @ 42% 9,967
500 (dividend allowance) @ 0% 0
14,500 @ 35.75% 5,184
Total 22,976
Less tax reducer (£14,900 @ 22%) (3,278)
Tax to pay 19,698

Investment bonds

The changes to the taxation of savings income from 6 April 2027 will result in some changes to the taxation of investment bonds. The internal tax rate paid by UK life funds will increase to 22% from 20% on non-dividend income.

Dividends will continue to be exempt. Chargeable event gains of an investor will be taxable at the increased savings income tax rates, to the extent that the gain exceeds available savings income reliefs. The personal savings allowance is £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer. The £5,000 starting rate nil band for savings income has been frozen until 2031, like most other allowances and reliefs. Offshore bond gains will simply be subject to the new rates of tax.

If the gain arises on a UK bond, the investor will receive a tax credit of 22%. Basic rate taxpayers will have no further liability, while higher rate taxpayers will pay another 20% and additional rate taxpayers another 25%. The legislation has been amended so that the tax treated as paid in the top slicing relief calculation will reflect the new rates.

Practical tip

Consider whether, once property income tax rates rise in April 2027, your letting business will still be worth operating, particularly if it was previously a furnished holiday letting and so has also been hit by the disallowance of finance costs in April 2025.