The Chancellor, John Healey, declared that “This is a Budget for the working people of Britain” when presenting the UK Government’s package of tax measures at the Budget on 28 October. This article reviews the headline changes to the UK income tax regime and sets out some of the potential planning options available to help manage their impact and maximise your wealth.
The main income tax changes can be summarised as follows:
- UK income tax thresholds will be frozen until at least 6 April 2031.
- The income tax personal allowance will be frozen at £12,570 until at least 6 April 2031. It was, however, confirmed that a new Pension Tax Allowance (PTA) will be introduced to prevent state pensioners with income under £13,037 being subject to income tax.
- Dividend tax rates remain at 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
- Savings (e.g. interest) tax rates will increase by 4% to 24% for basic rate taxpayers, 44% for higher rate taxpayers and 49% for additional rate taxpayers from 6 April 2027. This is a further increase of 2% from the rises originally announced by Rachel Reeves in last year’s UK Budget.
- New income tax rates will also apply from 6 April 2027 to rental income from property owned by taxpayers resident in England, Wales and Northern Ireland (basic rate – 24%; higher – 44%; property additional rate – 49%). This is again a further 2% increase from the rates announced at last year’s UK Budget.
The Chancellor has therefore left the main rates of UK income tax, National Insurance and VAT untouched, focusing instead on more targeted measures relating to ‘unearned income’ including savings and rental income.
It is important to remember that Scottish resident taxpayers are subject to income tax at the UK rates only on dividend and savings income.
Scottish resident taxpayers are subject to Scottish income tax rates on their property income. The new income tax rates for property income announced at the UK Budget will therefore not automatically apply to Scottish taxpayers. This is irrespective of where the rental property is situated.
The Scottish Government already has the power to set its own rates for property income. We will have to wait until the Scottish Budget on 3 December to see if the Scottish Government follows suit. It is worth, however, noting that Scottish rates of tax for higher and additional rate taxpayers are already higher than their counterparts in the rest of the UK.
What is the tax treatment of savings income?
Taxpayers with taxable income less than £17,570 may benefit from up to £5,000 of their savings interest being tax-free under the starting rate for savings. Every £1 of other income above their personal allowance will reduce the starting rate for savings by £1. Basic rate taxpayers and higher rate taxpayers benefit from Personal Savings Allowance (PSA) of £1,000 and £500 respectively without having to pay tax on it.
Savings income not covered by a taxpayer’s personal allowance, starting rate for savings or PSA will now be subject to income tax at 24% (basic rate), 44% (higher rate) and 49% (additional rate) from 6 April 2027.
What is the impact for you?
The UK Government’s stated objectives behind the increases in savings and property income tax rates are to support its commitment to fiscal discipline and to help fund its support for households and businesses.
Taxpayers who rely upon their savings and income from their personal property portfolios to provide a regular annual income stream will be facing increased tax liabilities when the new rates come into force. Landlords have increasingly come under the Government’s spotlight in recent years, both in terms of tax rules and rental property regulation. This latest tax increase will once again prompt landlords to consider how property is owned and whether it still remains an attractive form of investment for them.
What can be done to minimise the impact?
Married couples and civil partners
Married couples and civil partners should be reviewing how savings and rental property are held between them and currently taxed to establish whether there would be any tax benefit in transferring income producing investments to the lower tax rate paying spouse or civil partner. This could result in personal allowances being preserved and/or savings and property income being taxed at a lower rate.
There is currently no capital gains tax (CGT) charge on the transfer of assets between spouses or civil partners. In practice, transfers of savings may be more straightforward than interests in property, especially where there are mortgages secured over the properties in question. The legal and tax implications should be established before any transfer takes place.
Investments
There are a number of potential investment options available, which either favour capital growth (e.g. capital investment bonds), shelter investment income tax-free (e.g. ISAs) and/or offer tax incentives for savings over longer terms (e.g. Enterprise Investment Scheme investments). Taxpayers considering converting assets generating savings income should first seek appropriate financial advice before taking any action.
Property ownership structures
Landlords affected by the increase in property income tax rates will once again be considering whether they should continue to hold the property in personal ownership or transfer the property into a partnership or company structure.
How we can help
The fact that the rise in property tax rates hasn’t been extended to rental property held in companies makes company ownership at first sight an appealing proposition. However, the transfer of an existing personal property portfolio into a company could trigger both upfront CGT and SDLT/LBTT charges that may negate the future tax benefits. However, company ownership may be more attractive where taxpayers are looking to purchase new rental property.
We would strongly recommend that you establish the tax, legal and financial implications, and seek specialist tax and financial advice tailored to your own circumstances before taking any action.
If you would like advice on any of these changes, please contact Martin Campbell or a member of our Tax team.