A shake-up in the HMRC personal tax-free allowance rules is set to increase annual tax burdens for some UK taxpayers by approximately £180. The new regulation, coming into effect in 2027, will affect how personal allowances are allocated across different income sources, particularly impacting investors and landlords.
Currently, the personal allowance of £12,570 — the amount of income tax-free each year — can be allocated in the most tax-efficient way. This often means deducting the allowance from earned income first, but taxpayers may benefit from spreading it across savings and dividend income, which generally face higher tax rates. HMRC usually applies this allocation automatically, but individuals can request a more favorable breakdown.
From 2027, however, the personal allowance must be assigned first to employment, trading, or pension income. This change will push more remaining income, such as dividends, property rental income, and savings, into higher tax brackets, increasing overall tax liabilities.
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For example, consider someone earning £29,775 in salary, alongside £15,000 in property income, £5,715 from savings, and £1,885 in dividends. Under current rules, the personal allowance can be split strategically—saving tax on savings and dividends and resulting in a total tax bill of £7,913 according to accountants Blick Rothenberg. Under the new rule, all the allowance would be deducted from earned income only, resulting in a £614 tax increase, with £182 attributed directly to the personal allowance restriction and the remainder due to higher tax rates.
Tax experts warn that while the government aims to raise revenue without increasing taxes on working income, these changes may discourage saving outside ISAs and pensions and could push rent prices higher. The new rules particularly affect those who are asset-rich but have limited cash flow.
Tom Goddard of Blick Rothenberg said, “The changes add to the highest post-war tax burden and may deter saving while increasing costs for tenants.” Chris Etherington of RSM called the change a “technical tweak” that might feel like yet another stealth tax increase, especially for those receiving income from savings and rentals.