Changes to the calculation of Income Tax

A number of changes to the taxation of dividends, property income and savings income were announced in the Autumn Budget 2025. These measures will affect the rates at which different types of income are taxed and will be introduced in stages over the next few years.

From April 2026, the tax rates applying to dividend income will increase by 2%. The ordinary dividend rate will rise to 10.75%, while the upper dividend rate will increase to 35.75%. The dividend additional rate and the dividend trust rate will remain unchanged at 39.35% as will the dividend allowance at £500.

Further changes will apply from April 2027. Income Tax rates on both property income and savings income will increase by 2%. For the 2027–28 tax year, property income will be taxed at 22% (basic rate), 42% (higher rate) and 47% (additional rate). Savings income will also be taxed at the same rates.

Alongside these rate changes, the government is also reforming how Income Tax is calculated by altering the current ordering rules that determine the calculation of Income Tax. Under the current system, savings and dividend income are treated as the highest part of an individual’s income. Most other income, such as employment, pension or trading income, is grouped together as “non-savings, non-dividend income” and taxed first.

Under the new rules, the revised order of taxation will be:

1. Income that is not property, savings or dividend income
2. Property income
3. Savings income
4. Dividend income

These changes to the calculation of Income Tax are intended to better reflect the different nature of income sources and ensure the new tax rates for property, savings and dividends operate as intended.