Key Changes to Asset Income Tax Rates
From the Budget 2025 announcements, significant tax changes take effect:
- Dividend ordinary rate increases from 8.75% to 10.75%, upper rate from 33.75% to 35.75% from April 6, 2026. The additional rate remains at 39.35%.(gov.uk)
- Savings rates for basic, higher, and additional rate taxpayers will each rise by 2 percentage points, effective April 2027.(gov.uk)
- Property income will have its own tax rate bands—22%, 42%, and 47%—from April 2027, matching the general income rate bands. Also, the order in the calculation of taxable income shifts so property income sits before savings and dividends.(gov.uk)
Tax-Planning Opportunities & Pitfalls
What to watch out for:
- Passive income like dividends or rental profits will now be taxed more heavily, sometimes earlier in the income hierarchy, increasing overall liability.
- Reliefs and allowances will be applied first to “non-property, non-savings, non-dividend” income. This may leave less room for allowances against asset income.(gov.uk)
- For landlords, finance cost relief (e.g. mortgage interest) will be limited to property basic rate (22%) rate once separate property rates take effect.(gov.uk)
Possible planning strategies:
- Use tax-free wrappers: ISAs, pensions, etc., to shelter dividend and savings income.
- Consider timing distributions: If you expect to drop into a lower rate this year (e.g. by reducing taxable non-asset income), defer dividend payments.
- Rental portfolio structures: high-cost property finance and management expenses could be timed before changes take full effect.
- Splitting ownership or using joint ownership may help in aligning income to lower brackets.
Example Scenarios
Scenario 1: Emma earns £60,000 employment income + £5,000 dividends. Under the new rates, instead of paying 8.75% on dividends, she pays 10.75% from April 2026. Small change in overall tax, but adds up over multiple income sources or for higher amounts.
Scenario 2: Mark is a landlord with rental income after expenses of £40,000 and a mortgage interest bill of £10,000. When property incomes get their own rates in April 2027, he will receive finance cost relief at only 22%, rather than potentially mixing with higher rates for his total income. This heightens the importance of maximizing deductions and expense claims now.
What You Should Do Now
- Review your investment portfolio to understand how much of your income is from dividends, savings, or property.
- Maximise tax-efficient accounts — ISAs, SIPPs, etc.
- Reconsider distributions of dividends, if you have control (e.g. via a private company).
- Landlords: Examine property finance costs, consider accelerating repairs or maintenance in advance, ensure you claim all allowable expenses.
- Seek advice sooner — rather than later — especially if you expect income close to higher-rate thresholds.
These changes aim to reduce the gap between how income from work and income from assets is taxed. With thoughtful planning, you can limit surprise tax bills and make efficient use of allowances before new rules take full effect.