Policy paper

Change to tax rates for property, savings and dividend income — technical note

Published 26 November 2025

Introduction

At Budget 2025, the government announced it is changing rates of tax on property, savings and dividend income to ensure income from assets is taxed fairly. Those with property, savings or dividend income pay less tax than those whose income comes from employment or self-employment as they do not pay National Insurance. The government is increasing taxes on property, savings and dividend income, to help narrow the gap between tax paid on work and tax paid on income from assets.

Policy summary

Changes to the calculation of Income Tax

A change to the current ordering rules will mean that, where possible, the personal allowance and other reliefs must be set against income which is not property, savings or dividend income first, and other types of income after that.

Property income

• Income Tax rates for property income will be 22% at the property basic rate, 42% at the property higher rate, and 47% at the property additional rate for 2027 to 2028
• the property allowance and Rent a Room Scheme are unchanged
• carried forward property losses must still be offset against property income
• relief for residential finance costs will be calculated at the property basic rate (22%)

Savings income

• Income Tax for savings income will now be 22% at the savings basic rate, 42% at the savings higher rate and 47% at the savings additional rate for 2027 to 2028
• the starting rate for savings and personal savings allowance remain unchanged
• from 6 April 2027 the annual ISA cash limit will be set at £12,000, within the overall annual ISA limit of £20,000. Savers over the age of 65 will continue  to be able to save up to £20,000 in a cash ISA each year

Dividend income

• Income Tax for dividend income will now be 10.75% at the ordinary rate and 35.75% at the upper rate from 2026 to 2027. The dividend additional rate and dividend trust rate will both remain unchanged at 39.35%
• 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%
• the dividend allowance will remain unchanged

Interaction with devolved taxes

• the changes to savings and dividend rates will apply UK-wide
• the separate rates of tax for property income will apply to England, Wales and Northern Ireland. The government will engage with the devolved governments of Scotland and Wales to provide them with the ability to set property income rates in line with their current Income Tax powers in their fiscal frameworks

Implementation

• these changes are included in Finance Bill 2025 to 2026
• the changes to dividend income will take effect from 6 April 2026, and the changes to property and savings income will take effect from 6 April 2027

Changes to the calculation of Income Tax

Separate tax rates for property income

Under the current rules, there are specific tax rates for savings and dividend income. This income is treated as the highest part of a person’s total income (and so is potentially subject to higher rates of Income Tax).

All other income (for example employment, pension, trading or property income) is currently grouped together as ‘non-savings, non-dividend’ income and taxed first.

These changes will create separate tax rates for property income. Property income will now be taxed after employment, trading and other income but before savings and dividend income.

The new order of taxation for the purposes of the income tax calculation will be as follows:

1. income which is not property, savings or dividend income
2. property income
3. savings income
4. dividend income

Changes to the use of allowances and reliefs

Under the current rules in chapter 3 of part 2 of the Income Tax Act 2007, allowances and reliefs must be used in a way that minimises an individual’s overall liability to Income Tax.

These rules will be changed so that any available allowances and reliefs which can be used against income not from property, savings or dividends must be used against this income first.

This will mean that any available allowances or reliefs (including the personal allowance) are deducted from income which is not property, savings or dividend income first. If the amount of the allowances or reliefs exceeds this income, the balance is then deducted from property income, savings income or dividend income in the way which is most beneficial for an individual.

Once the available allowances and reliefs have been used up, any remaining income is allocated to the rate bands of income taxation: basic rate (£37,700), higher rate (£87,440) and additional rate in order.

Wider Income Tax calculation

Aside from these changes, most other aspects of the Income Tax calculation will remain the same. An example Income Tax computation is included at the annex.

Treatment of property, savings and dividend income for National Insurance contributions (NICs) purposes will not change as a result of this policy.

Property income tax changes

Definition of property income

The changes apply to property income for Income Tax purposes, the definition of which remains unchanged. Examples of this includes income from property letting and property income distributions from investment funds.

The Rent a Room Scheme remains unchanged, and the property allowance also remains unchanged.

New property Income Tax rates

The rates of Income Tax on property income will be as follows:

• property basic rate 22%
• property higher rate 42%
• property additional rate 47%

Carried forward property losses

Carried forward property losses must still be set against property income.

Treatment of residential finance costs

Under the current rules, individuals with residential finance costs cannot deduct finance costs as an expense in calculating profits from their property business. Instead, individuals receive basic rate relief as a tax reduction through Step 6 of the Income Tax calculation (the Steps are set out in section 23 of the Income Tax Act 2007). A similar treatment applies to accumulated and discretionary trusts.

Taxpayers will continue to receive relief in this way but this will be at the property basic rate from 2027 to 2028.

Non-resident landlords

The UK asserts its right to tax income derived from UK property. Where non-resident taxpayers are also taxed on that income in their home state double tax relief may be available.

The Non-Resident Landlords Scheme (NRLS) currently withholds Income Tax at the basic rate on UK property income arising to landlords outside the UK. Following these changes, the NRLS rate of withholding tax will be the [property basic rate].

Non-UK landlords can apply for HM Revenue and Customs (HMRC) authorisation to receive rent gross and submit tax returns in the normal way, and those subject to NRLS withholding tax may also submit tax returns to pay any additional tax due in the UK. For these taxpayers the new tax rates for individuals will apply and any credit for the amount of tax withheld on property income will be given in the usual way.

Investment funds

The rate of withholding tax on property income distributions from real estate investment trusts and property authorised investment funds will be the property basic rate.

Savings Income Tax changes

The rates of Income Tax on savings income will be as follows:

• savings basic rate 22%
• savings higher rate 42%
• savings additional rate 47%

The definition, structure, and available allowances will remain the same. These include:

• starting rate for savings – 0% tax rate on savings income up to £5,000 for those taxpayers with up to £17,570 of income not from savings, dividends or property
• personal savings allowance – 0% tax rate on savings income up to £1,000 for basic rate taxpayers and up to £500 for higher rate taxpayers

From 6 April 2027 the annual ISA cash limit will be set at £12,000, within the overall annual ISA limit of £20,000. Savers over the age of 65 will continue to be able to save up to £20,000 in a cash ISA each year.

Following these changes, the rate of withholding tax on yearly interest will be the savings basic rate.

Dividend Income Tax changes

The rates of Income Tax on dividend income will be as follows:

• dividend ordinary rate: 10.75%
• dividend upper rate: 35.75%
• dividend additional rate: 39.35%

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%.

The dividend allowance will remain at £500.

Gift aid

Charities will continue to get Gift Aid at the main basic rate and donors will still be entitled to relief at the main higher and additional rates.

Partnerships

These changes apply to individual partners, and the mixed member rules may apply where partnerships have a mixture of individual and corporate members.

Trusts

The new rates of Income Tax for property, savings and dividend income will apply to income received by trusts in line with those for basic rate or additional rate individuals depending on the type of trust. Rates for other income sources will remain unchanged.

For trusts with accumulated or discretionary income, the new rates will be:

• property and savings income: 47% (from 2027 to 2028)
• dividend income: 39.35% (unchanged)
• other income: 45% (unchanged)

For other trusts:

• property and savings income: 22% (from 2027 to 2028)
• dividend income: 10.75% (from 2026 to 2027)
• other income 20% (unchanged)

Estates

The new rates of Income Tax for property, savings and dividend income will apply to income received by estates of deceased persons in line with those for basic rate individuals.

The new rates will be:

• property and savings income: 22% (from 2027 to 2028)
• dividend income: 10.75% (from 2026 to 2027)
• other income: 20% (unchanged)

Tax administration

The new rates on dividend income will apply from 6 April 2026, and on savings and property income from 6 April 2027. For taxpayers whose tax is collected through their tax code, the new rates will be applied by HMRC when they become effective.

HMRC will continue to collect information about taxpayers’ savings income from banks and building societies in the usual way. That process will be unaffected by the new rates and HMRC will continue to use the information from banks and building societies to adjust the amount of liability on savings collected through tax codes.

Taxpayers should continue to register for, and file a Self Assessment tax return, where they meet the criteria.

These changes do not affect Making Tax Digital for Income Tax, which will transform how sole traders and landlords manage their tax. From April 2026, sole traders and landlords with a turnover above £50,000 will need to:

• keep digital records of their income and expenses
• send quarterly updates to HMRC
• submit their tax return by 31 January the following year

Interaction with devolved taxes

The changes to savings and dividend rates will apply UK- wide.

The separate rates of tax on property income will apply to England, Wales and Northern Ireland. The government will engage with the devolved governments of Scotland and Wales to provide them with the ability to set property income rates in line with their current Income Tax powers in their fiscal frameworks.

Implementation

A Tax Information and Impact Note is being published alongside Budget 2025, and these changes will be legislated in Finance Bill 2025 to 2026. The dividend rate changes will take effect from 6 April 2026. The property and savings changes will take effect from 6 April 2027.

Annex: Example Income Tax calculation

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