Some taxpayers may face £180 hit after personal allowance shake-up
Some taxpayers will face extra charges worth £182 next year due to changes to personal allowances announced in the last Labor Budget, money experts have warned.
The change will also affect individuals who earn additional income outside of employment-related earnings, such as investors and homeowners, and will move more of that income into higher tax brackets.
Under current rules, HMRC allows personal allowance to be allocated in a way that is most tax efficient for taxpayers. Since 2021, no tax will be owed on anything below the threshold, which is frozen at £12,570.
In most cases, this means deducting the personal allowance from earned income first. However, those with savings and dividend income sometimes adjust their allowances based on these other sources.
HMRC usually does this automatically, but taxpayers can also ask the authority to allocate their personal allowance in a more tax-efficient way.
However, this situation is changing as of 2027. From April of the same year, the personal allowance must be allocated primarily to employment, business or retirement income.
The change means some taxpayers’ income will be transferred to higher tax rates on dividends, property income and savings.
Accountancy firm Blick Rothenberg gives the example of a worker whose salary is £29,775, with property income of £15,000, savings income of £5,715 and dividend income of £1,885.
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This person could ask HMRC to allocate £7,075 of their personal allowance to earnings, £5,215 to savings income and £280 to dividend income, giving them a total tax bill of £7,913.
But from 2027 the personal allowance will only be deducted from earned income, meaning a tax increase of £614. This is mostly due to higher tax rates, but also due to the £182 personal allowance restriction.
Blick Rothenberg’s Tom Goddard said Telegram: “While I agree with the policy objective, the changes are nothing more than another tax increase contributing to the highest post-war tax burden.
“The aim is clear: the government is trying to raise income without increasing tax for the working population. But the changes are likely to discourage savings (apart from Isas and pensions) and lead to rent increases for tenants. Additionally, the changes are likely to be felt most by the asset-rich but cash-strapped.”
A Treasury spokesman said: “We have the right economic plan; the fair and necessary decisions we have made in the Budget mean we can offer support to families and businesses, including reducing the cost of living.
“We are taking action to ensure that income from assets is taxed more fairly and close the gap with tax paid on work.
“The majority of taxpayers have no taxable savings or property income, and Isas and tax-free allowances will continue to protect those with small incomes from assets.”
