Taxpayers Face £182 Hit as HMRC Changes Personal Allowance Rules
Certain taxpayers could be hit with an additional charge of up to £182 next year following significant changes to the personal allowance system announced in the last Labour Budget, according to financial experts. The alterations will specifically impact individuals who generate income outside of traditional employment, such as investors and landlords, by forcing more of their additional earnings into higher tax brackets.
How the Current System Works
Under existing regulations, Her Majesty's Revenue and Customs (HMRC) permits the personal allowance to be allocated in the most tax-efficient manner for each taxpayer. The personal allowance, which has remained frozen at £12,570 since 2021, represents the amount of income on which no tax is owed. Typically, this allowance is deducted from earned income first. However, individuals with savings and dividend income sometimes apply their allowance against these alternative sources to minimise their tax liability.
While HMRC generally handles this allocation automatically, taxpayers retain the right to request a more advantageous distribution of their personal allowance across different income streams.
The Upcoming Changes from 2027
Starting in April 2027, this flexible approach will be eliminated. The new rules mandate that the personal allowance must first be applied against employment income, trading income, or pension income. This shift means that for many taxpayers, their additional income from dividends, property, and savings will be pushed into higher tax rates, resulting in increased tax bills.
Accountancy firm Blick Rothenberg provides a concrete example to illustrate the financial impact. Consider a worker earning a salary of £29,775, with £15,000 in property income, £5,715 in savings income, and £1,885 in dividend income. Under current rules, this individual could request HMRC to allocate £7,075 of their personal allowance against earnings, £5,215 against savings income, and £280 against dividend income, leading to a total tax bill of £7,913.
From 2027 onwards, the personal allowance would be deducted exclusively from earned income. This change would result in a tax increase of £614 for this hypothetical taxpayer. While the majority of this rise stems from higher tax rates, £182 is directly attributable to the new restriction on personal allowance allocation.
Expert Analysis and Government Response
Tom Goddard of Blick Rothenberg commented on the policy, stating, "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 defended the measures, saying, "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."
The impending changes highlight a significant shift in tax policy aimed at generating additional revenue while ostensibly protecting the working population. However, the financial burden will fall disproportionately on those with diverse income streams, potentially affecting investment behaviours and rental markets across the country.
