Key takeaways
- Property income: For 2027/28, separate rates of income tax apply to property income. The rates are two percentage points higher than the equivalent rates for 2026/27.
- Order of taxation: Property income will be taxed after other income and before savings and dividend income.
- Allowances and relief: Allowances and reliefs must be deducted from other income first.
At the Autumn Budget 2025, the government announced the following changes to the calculation of income tax for individuals from April 2027:
- the introduction of separate rates of tax for property income. The property rates are two percentage points higher than the rates of tax that would have applied had separate rates not been introduced;
- an increase of two percentage points in the rates of income tax for savings income; and
- changes to the way in which income tax allowances and reliefs are offset.
The changes – together with the increase in the dividend ordinary and higher rates that took effect from April 2026 – were subsequently legislated for in the Finance Act 2026 (s6-8 and Schedules 1 and 2).
Although the focus in this article is on the rules applying to individuals, it should be noted that changes have also been made affecting trusts and estates.
Property income
The introduction of separate rates of tax for property income represents a significant change to the calculation of income tax. When the changes were announced, the government estimated that, by 2029/30, 2.4m landlords would face an increased tax liability as a result of this measure.
Key points to note for 2027/28 onwards include that:
- Property income is taxed after other income and before savings and dividend income (s16 and 16A, Income Tax Act (ITA) 2007). ‘Other income’ is all taxable income other than property, savings and dividend income. For 2026/27 and earlier, property income was a component of other income.
- The property rates are:
- basic rate: 22% (equivalent rate for 2026/27: 20%);
- higher rate 42% (2026/27: 40%); and
- additional rate: 47% (2026/27: 45%).
- The property basic rate (22%) will apply for the purposes of relief for residential finance costs and the withholding of income tax under the non-resident landlords scheme. This is the case throughout the UK.
For the avoidance of doubt, no changes have been made with regard to the following:
- the definition of “property income”. Although this term is now defined by new s17A, ITA 2007, the explanatory notes to the Finance Act 2026 explain that this is achieved “by cross-reference to existing legislation that already makes income from property chargeable to tax”;
- the £1,000 property allowance;
- the rent a room scheme; and
- relief for property losses. Property losses carried forward from 2026/27 can continue to be utilised as normal.
Savings income
The rates of income tax on savings income for individuals are as follows:
| 2026/27 | 2027/28 | |
|---|---|---|
| Basic rate | 20% | 22% |
| Higher rate | 40% | 42% |
| Additional rate | 45% | 47% |
Allowances and reliefs
For 2026/27 and earlier, s25(2), ITA 2007 provides that, in calculating the individual’s income tax liability, the relevant reliefs and allowances should be deducted “in the way which will result in the greatest reduction in the taxpayer's liability to income tax”. This is often referred to as the ‘beneficial ordering rule’.
For 2027/28 onwards, the application of s25(2), ITA 2007 is modified by new s25(3A), ITA 2007, which provides that reliefs and allowances (eg, the personal allowance) must be deducted from ‘other income’ (as defined above) first. Any remaining reliefs or allowances can then be deducted from property, savings or dividend income in the order that is most beneficial for the taxpayer.
P800 calculation errors
The P800 is an end of year tax calculation that reconciles the tax due for the year with the tax collected via pay as you earn (PAYE). In 2021, it became apparent that HMRC’s P800 tax calculation software did not automatically apply the beneficial ordering rule. HMRC is in the process of reviewing P800s and will contact affected taxpayers. Adelle Greenwood, Tax Technical Manager, ICAEW, has recently written an article for Taxation in which she encourages taxpayers to review the P800 and to contact HMRC if they think an error has been made.
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