The freeze continues as widely expected, the Chancellor, faced with a black hole in the public finances, has chosen to freeze income tax thresholds beyond April 2028, when they were due to start to increase. However, she went beyond the expectations of many and has decided that the thresholds should remain frozen for the following three years, meaning there will be no increase until April 2031.
This means the widely used term fiscal drag will continue to be a large part of the vocabulary for many years to come. Fiscal drag occurs when an individual’s wages continue to grow and that growth drags them into the next tax threshold, meaning the income above the threshold is then subject to tax at the next rate.
The interesting point to note is that the Office for National Statistics states that the median income in the UK is £39,039, with wage rises across the UK in the last year being 5.3%. If we assume that wage rises remain at this level, the median income will exceed the high rate threshold in 2029/2030, so that someone on the median income will become a higher rate taxpayer, suffering 40%.
Dividends, savings and rents
Along with the fiscal drag, it was announced that individuals will see a 2% increase on dividend income, savings income and property income.
The increase to dividend rates is due to apply from April 2026 and will see the ordinary rate rise from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. The dividend rate for additional rate taxpayers is to remain unchanged at 39.35%.
From April 2027, the tax on savings income will also increase by 2% across all tax bands, resulting in the tax rates on savings being 22% for basic rate taxpayers, 42% for higher rate taxpayers and 47% for additional rate taxpayers.
Tax on property income is also to increase from April 2027. This increase will see the property tax rate rise to 22% for basic rate, 42% for higher rate and 47% for additional rate taxpayers (these are in line with the rates that currently apply to Scottish taxpayers). In addition to this, the restriction on finance will change from a 20% allowance to a 22% allowance.
The format in which individuals report and pay tax on these sources of income is to remain unchanged; however, these new rates will undoubtedly see the tax position for many individuals becoming more complex, with multiple different tax rates applying to different sources of income.
In Scotland, there are currently seven different tax rates for income tax, and these new rules will result in similar complex tax rates for English taxpayers. The Scottish Government is expected to publish Scottish income tax rates and bands in its Budget on 13 January 2026.
These changes are in addition to the extra complexities and costs that certain individuals (sole traders and landlords) are to face with the introduction of Making Tax Digital for Income Tax Self Assessment, which will apply from 6 April 2026, where income from self-employment and property exceeds £50,000. From 6 April 2027, the threshold will fall to £30,000 and then to £20,000 from 6 April 2028.
Agricultural and business property relief
Last year, the Chancellor announced restrictions to the reliefs that have existed since 1995, which allowed businesses and farms to pass to the next generation without any Inheritance Tax (IHT). From April 2026, Business Property Relief and Agricultural Property Relief are to be capped at £1 million per individual, and anything above this value in an individual’s estate would be taxed at 20%, half the normal rate.
However, there seemed to be an anomaly in the way this was implemented, such that if all of the business/agricultural assets were transferred between husband and wife, one of the allowances would be lost, limiting families to just £1 million of IHT relief. This was not in line with other IHT reliefs, which allow any allowances to be transferred.
The Chancellor has finally confirmed that she will change the draft legislation and allow the £1 million allowance to be transferred between spouses. There had been a push to ensure farmers and business owners changed their Wills or they would lose this relief but this change has corrected the position and will ensure that at the very least these business owners will benefit from the £2 million of 100% IHT relief, albeit this tax increase is causing a great deal of stress as families try to decide how they pass the business on to the next generation without an unwelcome tax bill.
Inheritance Tax rate bands – A further freeze
Similar to the income tax threshold and inheritance tax nil rate band (NRB) has been frozen since 2009 and was due to be increased by inflation from April 2030. However, the Chancellor has decided to extend this freeze for both the NRB and the residence Nil Rate Band (worth an additional £175,000 per person for those with estates under £2 million) for one more year, meaning that by April 2031, when they will start to increase again, the rate will have been frozen for more than two decades.
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