Plan ahead for new property and savings tax rates

From the 06^th April 2027 new higher rates of tax will apply to savings income and to property income which will be set at two percentage points higher than the standard income tax rates applying to trading income, employment income and pension income. The dividend tax rates will continue to apply to dividend income.

For 2027/28 onwards, a client’s tax bill will depend not only on their total income but also on how this is made up. A person with £60,000 of trading income will play less tax than someone with £60,000 of property income.

A further sting in the tail is that the ordering rules are also changed from the 06^th April 2027 to the detriment of the taxpayer.

Unlike employment and trading income, there is no National Insurance to pay on property and savings income. The higher savings and property tax rates are intended to level the field. However, the liability for individual National Insurance contributions ceases when a person reaches state pension age. This means that the higher property and savings rate will hit those who have looked to property or investments to provide them with an income in retirement, as may be the case for the self-employed who do not have the benefit of an employer paying contributions into a pension scheme on their behalf. When planning for retirement, this should be borne in mind.

Savings income

The taxation of savings income is complicated as there are various factors of play. Basic and higher rate taxpayers receive a personal savings allowance which enables them to receive some savings income tax free. The personal savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. Those paying tax at additional rate do not benefit from a personal savings allowance.

A further complication is the savings starting rate which is set at 0% and applies to savings which fall within the savings starting rate band. This is set at £5,000 (frozen at this level for tax years up to and including 2030/31), but is reduced pound for pound by taxable non-savings income in excess of the personal allowance. So, where a person has a pension of £14,000 and savings income, they will benefit from a savings starting rate band of £3,570 (£5,000- (£14,000-£12,570).

The combination of the personal allowance, the personal savings allowance and the savings starting zero rate mean that a person whose only income is savings income or savings and dividend income can receive savings income of £18,570 tax-free. This figure is increased if they have higher personal allowances, such as the marriage allowance, married couple’s allowance or blind person’s allowance.

To the extent that savings income is not sheltered by allowances or taxed at the starting zero rate, from the 06^th April 2027 it will be taxed at the savings income tax rates. For 2027/28, the savings basic rate is set at 22%, the savings higher rate is set at 42% and the savings additional rate is set at 47%.

From the 06^th April 2027, savings income is the second highest slice of income.

Where clients have savings income that will be liable to tax at the savings rates in 2027/28, it is advisable to consider making the most of the annual ISA allowance. However, from the 06^th April 2027, individuals under the age of 65 will only be able to invest £12,000 in a cash ISA (the ISA limit remains at £20,000 but the balance must be held in stocks and shares ISA’s). Interest on cash in a cash ISA is tax-free. Clients who are 65 and older at the end of the tax year can invest the full £20,000 limit in a cash ISA. For older clients relying on savings income, this can be advantageous.

Clients who are married or in a civil partnership may wish to review how their savings are held to avoid paying tax at the higher and additional savings rates unnecessarily.

Property income

From the 06^th April 2027 property income will be taxed at the new property income tax rates. For 2027/28 the property basic rate is set at 22%, the property higher rate is set at 42% and the property additional rate is set at 47%. These rates apply in England, Wales and Northern Ireland. At the time of writing, Scotland had not set separate tax rates for property income.

Property income comprises:

• The profits of a UK property business or an overseas property business chargeable under ITTOIA 2005, Part 3, chapter 3
• Adjustment income chargeable under ITTOIA 2005, part 3, chapter 7
• Rent receivable in connection with a UK section 12 (4) concern chargeable under ITTOIA 2005, part 3, chapter 8
• Rent receivable for UK electric-line wayleaves chargeable under ITTOIA 2005, part 3 chapter 9
• Post-cessation receipts arising from a UK property business chargeable under ITTOIA 2005, part 3 chapter 10

The introduction of the new property tax rates affects the tax relief for interest and finance costs incurred by a unincorporated property business in respect of residential property. Landlords are no longer able to deduct these costs when calculating their taxable rental profit. Instead, relief is given in the form of a tax reduction. Currently, this is calculated by reference to the basic rate of tax. However, from the 06^th April 2027, the property basic rate will be used instead to determine the reduction. Consequently, from the 06^th April 2027 a landlord running an unincorporated property business will be able to deduct 22% of their interest and finance costs in relation to residential lets, capped at the lower of:

• 22% of the interest and finance costs
• 22% of the property business profits
• 22% of the landlord’s adjusted net income

Landlords running an unincorporated property business can deduct interest and finance costs in relation to non-residential property when calculating their taxable rental profit. From the 06^th April 2027 onwards, this will secure relief at the landlord’s marginal property income tax rate.

Spouses and civil partners owning property jointly may wish to consider how property is owned and in what shares. The default is to tax each spouse/civil partner on 50% of the rental profits. However, where property is owned jointly as tenants in common in unequal shares by spouses or civil partners, by making a form 17 election they can instead be taxed on the income pertaining to their share. Spouses and civil partners can make use of the capital gains tax no gain/no loss rules to change the ownership to secure a more beneficial tax result.

Changes to the ordering rules

The ordering rules determine the order in which income is charged to tax and the order in which reliefs and allowances are allocated. Currently, the rules work to secure the best outcome, i.e. the lowest tax bill, for the taxpayer.

However, alongside the introduction of the savings income tax rates and property income tax rates, the ordering rules are changed to the taxpayer’s detriment. From the 06^th April 2027, employment income, trading income and pension income are taxed before property income, savings income and dividend income. Property income is charged to tax before savings income and, as now, dividend income is the top slice.

Likewise, reliefs are allocated to employment income, trading income and pension income before property income, savings income and dividend income.