Some taxpayers will be faced with an extra charge worth as much as £182 next year because of changes announced to the personal allowance at the last Labour Budget, money experts have warned.
The change will impact individuals who receive additional income outside of employment-related earnings, like investors and landlords, by pushing more of this into higher tax bands.
Under current rules, HMRC allows the personal allowance to be allocated in a way that is most tax-efficient for the taxpayer. Tax is not owed on anything below the threshold, frozen at £12,570 since 2021.
In most cases, this would mean deducting the personal allowance from earned income first. But those with savings and dividend income sometimes set their allowance against these other sources.
HMRC typically does this automatically, but taxpayers can also ask the authority to allocate their personal allowance in a more tax-efficient way.
But from 2027, this is changing. From April that year, the personal allowance must be allocated against employment, trading or pension income first.
The change means that the income of some taxpayers will be pushed into the higher rate of tax on dividends, property income, and savings.
Accountancy firm Blick Rothenberg gives the example of a worker on a salary of £29,775, with £15,000 in property income, £5,715 in savings income, and £1,885 in dividend income.
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This person could ask HMRC to allocate £7,075 of their personal allowance against their earnings, £5,215 against their savings income and £280 against their dividend income, giving them an overall tax bill of £7,913.
But from 2027, the personal allowance would be deducted only from their earned income, meaning a £614 tax rise. This would mostly be from higher tax rates, but £182 would be from the personal allowance restriction.
Tom Goddard, of Blick Rothenberg, told The Telegraph: “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. Additionally, the changes will likely be felt most by those individuals who are asset-rich but cash-poor.”
A Treasury spokesperson said: “We have the right economic plan – the fair and necessary decisions we made at the Budget mean we can deliver support for families and businesses, including cutting the cost of living.
“We are taking action to ensure income from assets is taxed more fairly, narrowing the gap with tax paid on work.
“Most taxpayers have no taxable savings or property income and Isas, and tax-free allowances will continue to protect those with small amounts of income from assets.”