UK Increased Income Tax 2026: Rates, Changes and Allowance Proposal

If you live and work in the UK, your taxes are going up. The government has announced several income tax changes that will affect workers, landlords, investors and savers. Some changes start in April 2026, and some start in April 2027. 

Real Estate Agents London covers the growing debate on the increased income tax-free allowance to £20,000, which received over 250,000 petition signatures. This guide explains who will be affected and how much you will pay. We also cover what you can do next to manage income-generating properties and comply with taxation.

What Is the Increased Income Tax in the UK?

Income tax is the money you pay to the UK government from what you have earned. This is the single largest source of revenue. According to the Office for Budget Responsibility (OBR), in 2025-26, this tax is expected to raise around £329 billion. It represents 26.7 % of all government receipts, equivalent to approximately £11,450 per household. It is levied on most forms of personal income, including:

• Earnings from employment
• Self-employment
• Savings
• Dividends and pension incomes
• Rental property

You don’t pay tax on everything you earn. Each individual gets a tax-free amount, called a Personal Allowance, that is £12,570 for 2026. Only income above this threshold is subject to income tax. According to the IFS, only around three-fifths of all UK adults earn enough to pay tax. 

Two changes are being implemented now in the UK. First, the government is raising taxes on certain income, such as money from dividends, savings and rental properties. 

Second, tax-free thresholds of personal allowance would be frozen for the four years 2022/23 to 2025/26. The number of taxpayers paying more in tax when allowances and thresholds are not increasing. This mechanism is known as “fiscal drag”.

Why Has the UK Government Increased Income Tax?

The primary reason the government is specifically raising tax rates on certain types of income is to promote fairness. People who earn money from assets, including shares, savings accounts and rental properties, do not pay National Insurance on that income. 

However, people who work and earn a salary (employed or self-employed) do pay this. The government thinks this gap is unfair. So, they are increasing taxes to narrow the gap between tax paid on work and on income from assets.

Moreover, the Chancellor, Rachel Reeves, announced at the Autumn Budget in 2025 (held on 26 November) that the freeze would be extended to April 2031. The reason for freezing is to raise additional revenue, support public services, and stabilise the country’s finances. According to OBR, if the freeze on income tax thresholds is extended to 2030/31, it will raise over £55 billion.

Current UK Income Tax Ratesand Bands (2025-26)

The current tax year runs from 6 April 2025 to 5 April 2026. Here are the income tax rates that apply in England, Wales and Northern Ireland for the 2025/26 tax year:

The standard Personal Allowance is £12,570. If you earn over £100,000, your tax-free allowance starts to decrease. For every £2 you earn, you lose £1 of your allowance. By the time you earn £125,140, your allowance is zero/nil.

Scotland Income Tax Rates

Here are the Scottish Income Tax rates for the 2025-2026 tax year:

What’s Actually Increasing? The Three Key Income Tax Changes

The Autumn Budget 2025 introduced three distinct sets of income tax rate increases, all legislated through the Finance (No.2) Bill 2024-26. They happen in two stages: one change in April 2026 and two in April 2027.

Dividend Income Tax Rise (From April 2026)

Payments from the company’s profits, specifically made to its shareholders, are named dividends. From April 2026, the first change in income tax on dividends takes place. The dividend income tax rate will increase by 2 percentage points at the ordinary and upper rates (2 of 3 bands). 

According to the official Gov.UK publication on income tax changes, the new rates will be:

A dividend allowance of £500 you get each year remains unchanged. Only dividend income above this allowance is taxed. These changes apply across the whole of the UK, including Scotland.

Savings Income Tax Rise (From April 2027)

The money a bank or building society pays you for keeping your money in a savings account is termed savings interest. If interest goes above your tax-free allowance, you have to pay income tax on it. From April 2027, those rates are going up:

Your personal savings allowance remains unchanged. You still get £1,000 of interest tax-free if you are a basic-rate taxpayer, or £500 if you are a higher-rate taxpayer. These changes also apply UK-wide, including Scotland.

Property/Rental Income Tax Rise (From April 2027)

Rental or property income will have its own separate tax rates from April 2027. These new rates apply in England, Wales and Northern Ireland. However, Scotland has its own distinct income tax criteria. The new rates are:

The UK government estimates around 2.4 million landlords, about 6% of all UK taxpayers, will pay more tax as a result of this change. However, they can still claim tax relief on their mortgage interest costs. 

But this relief will be calculated from 22% from April 2027 rather than the current 20% rate. Property allowance and threshold of the Rent A Room Scheme remain unchanged. 

UK Income Tax Allowance Increase Proposal: Will the Personal Allowance Rise?

Since April 2021, the personal allowance has not changed. It’s gonna stay frozen at the current level at least until April 2031. Now, the threshold is frozen at:

The “Stealth Tax”- Income Tax Threshold Freeze Until 2031

Wages usually increase each year due to the rising costs of living. Normally, tax thresholds also need to be increased in line with the rising prices. However, because these are frozen for years, an increase in pay forces income into the band above the threshold. As a result, a big portion of it is taxed.

Although recent UK interest rate cuts have eased costs slightly. But these frozen income tax thresholds still put pressure on household finances.

According to the OBR, this threshold freeze is expected to raise £12.7bn for the Treasury by the end of the 2030/31 tax year. The OBR also estimates that by 2029/30: 

• 780,000 people will start paying basic rate tax 
• 920,000 will move into the higher rate band 
• 4,000 will move into the additional rate band 

By 2030/31, around 24% of taxpayers will be paying a higher or additional tax rate than 15% in 2021/22. 

Scotland vs England, Wales & Northern Ireland – Are the Rates Different?

Yes, Scotland’s property income rate is different. The Scottish Parliament has its own criteria for income tax rates or bands on employment and self-employed income. Here is the breakdown of the new rate changes announced in the Autumn Budget 2025:

How Much More Will You Pay? (Simple Examples)

The taxable income due to rate increases and the threshold freeze depends on the level and type of income. Along with these rising income tax bills, some taxpayers may also face capital gains tax on profits from investments or property. 

Here’s a rough estimate of how much you need to pay. This can help you plan your finances.

Who Is Most Affected by the Increased Income Tax?

The increased income tax measure will affect:

• Individuals who receive income from letting property
• Individuals who earn interest from their savings
• Individuals who receive distributions, including dividend income
• Participants in close companies who receive loans or benefits from those companies.

According to Gov.UK, by 2029-30:

• Around 2.4 million landlords (about 6% of taxpayers) are expected to pay more tax due to this measure.
• Around 3.8 million people (approximately 9% of taxpayers) with savings income above the relevant tax-free allowances are likely to face higher tax.
• Around 3.9 million individuals (about 9% of taxpayers) are expected to see an increase in tax on their dividend income
• Around 1.6 million individuals will see no change in the tax they pay on dividends

How to Reduce the Impact of the Increased Income Tax

As a high earner in the UK, there are some ways to minimise your current and future tax liabilities:

Maintain Your Personal Income Tax Allowance

Every individual has an income tax allowance of £12,570 as the basic rate. The money you earn within this limit is considered tax-free. You can reclaim your personal allowance and minimise tax on any bonuses by paying them into your pension.

Use Any Marriage Tax Allowances

If one partner earns below £12,570 and the other is a basic rate taxpayer, they can transfer £1,260 of their unused allowance. In this way, they can save up to £252 yearly.

Use Personal Saving Allowances

If you are a basic-rate taxpayer, you can get tax-free interest up to £1,000 per year on savings. On the other hand, the higher rate taxpayer allowance is £500 per year. If you combine savings with your spouse or civil partner, you can get a maximum allowance of £2,000.

Use ISA Contributions

ISA is a wrapper that holds assets tax-free, including income, shares, stocks, cash, etc. Any income placed inside an ISA is completely protected. Everyone gets an annual allowance of  £20,000, which can be placed in multiple ISAs or just in a single ISA. If you have savings or investments outside the ISA, you can consider moving them to reduce your tax bill.

Maximise Annual Pension Contributions

A single penny you put into your pension reduces taxable income. The government stated that you can get tax relief on private pension contributions worth up to 100% of your annual earnings. You’ll either get the tax relief automatically or you’ll have to claim it yourself.

Making Tax Digital (MTD) for Income Tax

Along with all tax rate changes, the UK government also introduced the Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) requirement from 6 April 2026. If you are self-employed or a landlord, this could affect how you report your income and expenses to HMRC. 

Under MTD, affected taxpayers need to keep digital records of their income and expenses and give quarterly updates to HMRC each year through approved software. Based on your qualifying income, when you need to start using this MTD is outlined below: 

Conclusion

The increased income tax changes in the UK are affecting millions of people from April 2026 onwards. You will likely pay more tax in the coming years if you earn a salary, own rental properties, receive dividends or have some savings. The best thing to do now is to understand exactly how the increased income tax changes apply to your situation, property, and earnings. Using your ISA or pension can reduce the bill.

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