Background
In the budget delivered on 26 November 2025, Rachel Reeves announced income tax rate rises for both dividends and property and savings income, coming into effect from April 2026 and April 2027 respectively. These rises, coupled with the freezing of thresholds and allowances, means that more taxpayers will be facing higher income tax bills on their passive income.
Detail
Dividends
From 6 April 2026, the basic and higher rates of income tax on dividends will increase by 2%. The additional rate will remain unchanged. These changes are summarised below.
Current rate From 6 April 2026
Basic rate 8.75% 10.75%
Higher rate 33.75% 35.75%
Additional rate 39.35% 39.35%
There has been no change to the dividend allowance of £500 and therefore basic and higher rate taxpayers with dividends in excess of this amount will see an increase in their dividend tax from April 2026.
For owner-managed companies, in many cases, an individual employee shareholder would take a ‘reasonable’ salary, leaving the balance of their ‘drawings’ to be taken either as a bonus or a dividend payment. Following the change to rates of corporation tax in 2023, the benefit of taking a dividend over a bonus became much less apparent, and the imminent increase in rates of dividend tax is likely to further complicate this decision. It will therefore be necessary to look at each decision on a case by case basis, and if you have any questions regarding whether a bonus or dividend represents the most tax efficient profit extraction please speak to your usual contact at the firm.
The rate charged on companies under the loans to participators regime is automatically tied to the dividend upper rate and so will also increase to 35.75%. This will affect tax paid by a company on loans made to its participators on or after 6 April 2026.
Property income
From 6 April 2027 tax on property income will increase by 2% across every tax bracket, as follows.
Current rate From 6 April 2027
Basic rate 20% 22%
Higher rate 40% 42%
Additional rate 45% 47%
Property income will be treated as the next slice of income after other non-savings income, such as employment or pension income. Therefore, where a taxpayer has employment or pension income utilising their full basic rate band, the higher or additional rates will apply to their property income.
The rate of relief for finance costs on residential property will rise in line with the increased income tax rate, to 22% from 6 April 2027. In addition the property allowance remains available for use if expenses incurred total less than £1,000.
Savings income
Also from 6 April 2027, tax on savings income will increase by 2% and there will be no change to the personal savings allowance for each tax bracket, as follows.
Current rate From 6 April 2027
Basic rate 20% 22%
Higher rate 40% 42%
Additional rate 45% 47%
Savings income is taxed after non-savings and property income, but before dividends. There has been no change to the personal savings allowance thresholds and therefore a basic rate taxpayer continues to receive £1,000, a higher rate taxpayer £500 and additional rate taxpayer nil.
There has been no change to the starting rate band for savings income, and therefore taxpayers with non-savings income of less than £17,570 can continue to benefit from a 0% rate of tax on their savings income up to an amount of £5,000, in addition to their personal savings allowance.
If you would like to discuss how any of these changes may affect you please contact our Tax Director, Jenny Marks.
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