What the new UK tax rules mean for savings income and dividends

The Chancellor announced in her Autumn 2025 Budget that from April 2026 taxpayers will have to pay 2% extra tax on dividend income and from April 2027 an extra 2% on their savings income (comprising interest and rental income).

Interest

As interest rates are currently rising and tax thresholds have been frozen since 6th April 2023 and will continue to be until 5th April 2031 at the earliest, more people are paying tax on their savings.  The Personal Savings Allowance, which the then Chancellor George Osborne introduced in April 2016, exempts the first £1,000 of interest received in a tax year (which runs from 6th April in one year to 5th April in the next) for basic rate taxpayers, £500 for higher rate (40%) taxpayers and £Nil for those liable for the additional rate (45%). The latter will therefore pay 47% of such income to HMRC. These allowances have not changed since they came into force 10 years ago. HMRC estimate that 120,000 more taxpayers will breach the allowances in the forthcoming 2026-27 tax year (bringing the total number of such people to 2.8 million) and that the change will yield an additional £6.6 billion for the Treasury coffers.

Changes to the maximum amounts a person can contribute to an ISA (Individual Savings Account) also take effect on 6th April 2027. ISA’s offer tax free income and gains. The current limit of £20,000 will only be available if at least £8,000 of it is invested in a Stocks and Shares ISA. The limit for cash ISA’s is being reduced to £12,000 for those aged below 65. The aim is to encourage savers to invest in stocks and shares ISAs, which are long term investments designed for those who do not need immediate access to their savings. The move aims to boost the UK economy by increasing investment in stocks and shares. The effect, however, is to penalise those who are prudent with their hard-earned money and are reluctant to expose it to the volatility of the Stock Market.

Dividends

Dividends used to be the favoured way of extracting funds from an Owner Managed Business. The tax rates on them coupled with the reduction in the tax-free element from £5,000 from 6th April 2016 when it was introduced to £500 in the current tax year to 5th April 2026 mean that the tax liability on dividends is much closer to that on a bonus subject to PAYE income tax and employer’s and employee’s Class 1 national insurance. It is now necessary to look at each case separately to determine the most suitable solution. The additional 2% on dividends payable from 6th April 2026 (apart from the additional rate which remains unchanged at £39.35%) will affect the calculations.

Rental income

Mortgage interest allowed against rental income less other expenses has been phased out in stages from 6th April 2017 and is now limited to an allowable deduction of 20%. This has increased the tax payable and the extra 2% from 6th April 2027 will make the position worse, to the extent that ownership of highly geared properties is now less attractive and may lead to landlords deciding to sell properties.

What to do next

Gravita can help you navigate the UK tax system and suggest ways to reduce your exposure to higher rates of tax. Please contact us for a no obligation chat.