The New Order for Calculating Your Tax Liability

The government has established a new order for taxing different types of income. Property income will now be separated from other non-savings income and taxed before savings and dividend income. The new sequence is as follows:

1. Income which is not property, savings or dividend income (e.g., employment, trading, or pension income)

2. Property income

3. Savings income

4. Dividend income

The direct implication is that property income is now taxed in a fixed sequence after your primary employment or trading income. This prevents it from being sheltered by the personal allowance if you have sufficient primary income, pushing it into its own specific tax bands.

How Your Personal Allowance is Applied

A crucial change accompanies this new sequence. Your Personal Allowance (£12,570) and other reliefs must now be set against your non-property, non-savings, and non-dividend income first - with the changes to property income particularly significant for landlords and property investors.....and with that change, a change in the RATE applied:

• New Tax Rates: A new set of rates will be introduced specifically for property income:

  • Property basic rate: 22%

  • Property higher rate: 42%

  • Property additional rate: 47%

AND the tax rates on savings income will be brought into line with the new property income rates.

• New Tax Rates: The new rates on savings income will be:

  • Savings basic rate: 22%

  • Savings higher rate: 42%

  • Savings additional rate: 47%

ALSO changes to dividend tax rates will come into effect a year earlier than the other adjustments.

• New Tax Rates: The new rates on dividend income will be:

  • Dividend ordinary rate: 10.75%

  • Dividend upper rate: 35.75%

This simplified example (from HMRC website as at 30 November 2025), demonstrates how the new rules will be applied in practice:

Income Profile

• Employment Income: £30,000

• Property Income: £3,000

• Finance Cost Relief (for rental property): £1,000

• Savings Interest: £400

• Dividend Income: £200

Applying the Personal Allowance

• The £12,570 personal allowance must first be deducted from the employment income: £30,000 - £12,570 = £17,430 of taxable employment income.

Calculating Tax by Income Type

• Employment Income: £17,430 is taxed at the main basic rate of 20% = £3,486

• Property Income: £3,000 is taxed at the new property basic rate of 22% = £660

• Savings Income: The £400 of interest is covered by the Personal Savings Allowance, so the tax is £0.

• Dividend Income: The £200 of dividends is covered by the Dividend Allowance, so the tax is £0.

• Total tax calculated so far: £3,486 + £660 = £4,146

Applying Finance Cost Relief

• The tax reduction for finance costs is calculated on the £1,000 of interest expense at the new 22% property basic rate: £1,000 x 22% = £220.

Final Tax Liability

• The finance cost relief is subtracted from the total tax due: £4,146 - £220 = £3,926.

These all apply from 6 April 2027 - but, probably do not significantly impact your retirement income drawdown plans.

If you think it might have a significant effect on your position, drop us a line, and we’ll schedule a virtual coffee.