The government has unveiled a significant overhaul of the tax system, announcing new HMRC tax bands that will see some households facing a tax rate of up to 47% on property income. The changes, announced by Chancellor Rachel Reeves in the Labour Party's 2025 Budget, aim to create a fairer system by increasing taxes on income from assets.
Closing the Tax Gap: A New Approach to Asset Income
At the heart of the reform is the principle that income from assets like property, savings, and dividends has been taxed more lightly than income earned from employment. This discrepancy exists because earnings from work are subject to National Insurance contributions, while income from assets is not. The government is now taking steps to narrow this gap.
Chancellor Rachel Reeves stated, "It’s not fair that the tax system treats different types of income so differently." She confirmed that the basic and higher rates of tax on property, savings, and dividend income will increase by 2 percentage points, with an additional 2-point rise for the top rate on property and savings.
The New Tax Rates in Detail
The changes will be implemented over the coming years. For the 2027-2028 tax year, the new Income Tax rates for property income will be:
- 22% at the property basic rate
- 42% at the property higher rate
- 47% at the property additional rate
It is important to note that the property allowance and the popular Rent a Room Scheme will remain unchanged.
For dividend income, changes arrive a year earlier, from the 2026-2027 tax year. The new rates will be:
- 10.75% at the ordinary rate
- 35.75% at the upper rate
The dividend additional rate and the dividend trust rate will both stay at 39.35%. Furthermore, the dividend allowance will not be altered. As a consequence of these changes, the rate charged on companies under the loans to participators regime will automatically increase to 35.75%.
Impact and Government Assurance
Despite these increases, the government has moved to reassure the vast majority of savers. Chancellor Reeves emphasised that even after these reforms, 90% of taxpayers will continue to pay no tax at all on their savings. This indicates that the changes are targeted at those with significant asset-based income.
The new rates, which will see basic rate dividend tax rise to 10.75% and higher rates to 35.75% from April next year, were confirmed in a document published on the Office for Budget Responsibility's website. This marks a decisive shift in the UK's tax landscape, aiming to balance the contributions made by workers and asset holders.
