HMRC Personal Allowance Shake-Up to Impose £180 Annual Cost on UK Taxpayers
A significant change to how HMRC applies the tax-free Personal Allowance is set to cost some UK households approximately £180 per year. The new rule, which takes effect from 2027, will particularly impact investors and landlords by pushing more of their income into higher tax bands.
Understanding the Personal Allowance Change
Currently, the Personal Allowance – the amount of income you can earn before paying tax, set at £12,570 – must be allocated in the most tax-beneficial way for the taxpayer. This typically means it is deducted from earned income first, but for households with savings and dividend income, it can sometimes be applied against those other income sources instead.
HMRC handles this allocation automatically, though taxpayers can also request the most tax-efficient arrangement. However, from 2027 onwards, the Personal Allowance must be allocated against employment, trading, or pension income first under the new rules implemented by the Labour Party government.
Financial Impact on Taxpayers
This change means that more taxpayer income will be subject to higher rates of tax on dividends, property income, and savings. For example, consider an individual earning £29,775 with £15,000 in property income, £5,715 in savings income, and £1,885 in dividend income.
Under current rules, they could ask HMRC to allocate £7,075 of their Personal Allowance against earnings, £5,215 against savings income, and £280 against dividend income. According to accountancy firm Blick Rothenberg, this would save them from paying tax on their savings and reduce taxable dividend income, resulting in a total tax bill of £7,913.
From 2027, however, the Personal Allowance would only be deducted from their earned income, leading to a £614 tax increase. Of this amount, £182 is directly attributable to the Personal Allowance restriction, with the remainder resulting from higher tax rates.
Industry Reactions and Concerns
Tom Goddard of Blick Rothenberg commented: "While I agree with the policy objective, the changes are just another tax increase contributing to the highest post-war tax burden. The objective is clear: the Government is trying to raise revenue without increasing tax for the working population. However, the changes will likely disincentivise saving (outside Isas and pensions) and lead to increases in rent for tenants."
He added: "Additionally, the changes will likely be felt most by those individuals who are asset-rich but cash-poor."
Chris Etherington of accountancy firm RSM noted: "While many may be unaware of this change, they may not be surprised that there is an extra tax squeeze in store for those with income from savings and rental properties. It may be presented as a technical tweak to the rules but it might ultimately be seen by taxpayers as a further stealth tax rise."
Broader Implications
The rule change represents a strategic move by the government to generate additional revenue without directly increasing taxes on the working population. However, it raises concerns about potential disincentives for saving outside protected vehicles like ISAs and pensions, as well as possible rent increases for tenants as landlords pass on higher tax costs.
Taxpayers with diverse income streams, particularly those relying on investments and rental properties, should prepare for this upcoming change and consider consulting financial advisors to optimize their tax planning strategies ahead of the 2027 implementation.
