Four tax changes to watch out for in the 2026/27 financial year

As the end of the 2025/26 tax year fast approaches, it’s important that taxpayers are aware of the changes afoot for 2026/27 from 6 April.

David Little, Partner in Financial Planning at wealth management firm Evelyn Partners, says:

‘The end of the tax year is a good time to take stock and plan head. Most individuals and families will have settled the decisions they need to make for the 2025/26 tax year-end, especially if they benefit from professional advice.

‘Others might be scrambling to decide if or how to use up remaining allowances such as those for ISAs, pensions and gifting. But they should not forget about what’s happening in 2026/27, as changes to tax rules, allowances and rates coming in on 6 April could influence these last-minute decisions.

‘There are several important developments to be aware of.’

1. Dividend tax is increasing

From 6 April, the rates of tax payable on dividends from shares, and funds that invest in shares, will rise by 2 percentage points to 10.75 per cent for basic-rate taxpayers and 35.75% for higher-rate taxpayers. For additional-rate taxpayers, the rate will remain at 39.35%.

David says, ‘If investments are held outside a tax-free wrapper like a pension or ISA, then dividend income could be subject to a higher rate of tax from 6 April. With only a meagre £500 of dividends per person now protected from tax by the annual allowance, it’s essential that savers and investors recognise this and take action if necessary.

‘The increase means a basic-rate taxpayer earning £10,000 in dividends will – all other things being equal - pay £1,021 in dividend tax in the new tax year compared to £831 currently. A higher-rate taxpayer will pay £3,396, up from £3,206 currently.

‘Those affected should consider whether they can transfer unprotected investments into a tax-free wrapper – typically an ISA, pension or for larger portfolios, an Offshore Bond – although they should be aware that the process of selling and repurchasing could lead to a taxable capital gain. Couples can make sure they are making the most of their combined allowances and married couples can benefit from interspousal transfers to make sure their investments are held tax-efficiently.

‘Higher and additional rate taxpayers in search of tax-efficient income from their investments might also consider investing directly in low coupon gilts, where most of the quite high probable “yield” will come in the form of tax-free capital gains. This is best considered with the advice of a financial planner or investment manager.’

Additionally, of note for business owners and investors:

• Capital Gains Tax: The rate for Business Asset Disposal Relief (BADR) and Investors' Relief increases to 18% (up from 14%).
• Business Rates: Revaluations and new five-tier multiplier system.
• Venture Capital Trusts: Upfront income tax relief for VCT subscriptions is reduced from 30% to 20%.

2. Allowances and thresholds remain frozen

David says: ‘This “non-change” is in some ways the most important change of all, because it’s another year when most tax thresholds and allowances will shrink in real terms, exposing more earnings and wealth to tax.’

The Chancellor announced in the November 2025 Budget that income tax thresholds will stay at their current levels until April 2031. For income tax, the personal allowance (the amount of tax-free income you can earn each year) will remain at £12,570, while the higher-rate tax threshold will stay at £50,270 and the additional-rate threshold will remain at £125,140.  Scotland’s taxpayers have their own rates and tax bands which are even more punitive for high earners.

‘Furthermore, the “£100k tax trap” remains frozen in time. Introduced in the Finance Act 2009 by Alistair Darling and unchanged since, this refers to the sharp rise in an individual’s effective marginal tax rate to 60% on taxable income between £100,000 and £125,140.

‘Once taxable income exceeds £100,000, the tax‑free Personal Allowance (£12,570) is gradually withdrawn at a rate of £1 for every £2 of additional income. As a result, each extra £100 earned in this band is hit not only by the standard higher‑rate tax, but also by an additional 20% tax effect due to the loss of previously tax‑free allowance - creating a combined effective rate of 60%, plus National Insurance.

‘In practice, this means a pay rise or bonus in this range can leave someone keeping only £40 of every £100 earned, making it one of the most punitive marginal tax zones in the UK tax system.  Due to the different tax bands in Scotland, this rate is equivalent to 67.5% for Scottish taxpayers.’

David adds: ‘Likewise the inheritance tax nil-rate bands, the annual exemptions for capital gains and dividends, and the personal savings allowance remain frozen in money terms and so offer shrinking protection in real terms. All this means more workers and more families will either face tax bills where they would not have previously, or will pay out more in tax, and possibly pay tax at higher rates.

‘Being drawn into higher income tax bands doesn’t just mean the marginal rate of tax on your earnings rises, but also that you are subject to higher rates of tax on capital gains and dividends, and that your savings allowance shrinks or disappears. So, possible steps that keep you in the lower tax band – such as paying more into a pension – are more important to consider each year that goes by. As are the tax planning opportunities for couples, especially those married or in civil partnerships, who can use two sets of allowances to maximum effect.

‘As the tax burden grows and becomes more complex, and the net of wealth taxes spreads wider, more individuals, couples and families will realise that good financial planning advice can be hugely beneficial - especially when it comes to potentially complex areas like estate and succession planning.

‘With IHT nil-rate bands remaining in a long-term freeze and asset values having generally increased over recent years, many more families are being drawn into IHT liabilities – a trend that will be swelled by the IHT reforms which take effect in the next 18 months. We are having a lot of conversations about IHT with clients since the October 2024 Budget announced changes to agricultural property and business relief (see 3 below) and the inclusion of unspent pension assets from April 2027. 

‘Solutions like lifetime gifting are best done with professional advice and cash-flow modelling and in the case of trusts – which are becoming more relevant to more estates – it's essential.’

3. Major change to IHT business reliefs

From 6 April, the current 100 per cent rates of agricultural property and business relief will apply only to the first £2.5million of relevant assets, the threshold having been recently raised from the £1million announced at the October 2024 Budget. The new cap means many business owners and their families face a greater IHT bill at death. AIM-listed shares will only receive 50 per cent relief.

David says, ‘In some cases an unexpectedly large IHT bill can jeopardise the future of a firm and the jobs it provides if the liquid assets are not there to meet the expense. For many business owners looking at the long-term prospects for their firm and their family’s financial security, 6 April this year is a clear deadline for planning.

‘Transfers of assets that can be made today with no immediate tax charge will be limited after this date. Although it might now be too late for some of the legal steps that can be necessary for the most complete succession strategies, we would encourage all business owners who might be affected by the changes to have a conversation with a financial planner or tax adviser as soon as possible. There will still probably be advantageous financial planning options.

‘Spouses will be able to inherit any unused relief, similarly to the IHT nil-rate bands, so any of the £2.5million allowance unused at death will be transferred to the surviving spouse - and it is not necessary for the deceased spouse to have owned qualifying assets. A good financial planner with experience of businesses can check at the very least whether Wills are drawn up in the most favourable way and whether any transfer of assets should be put in motion.’

4. Full state pension nudges up to Personal Allowance

David says, ‘OK so not a tax change as such, but it could have tax consequences.’

From 6 April, the UK state pension is due to rise 4.8 per under the triple‑lock. The full rate for post‑2016 retirees will rise from £230.25 per week to £241.30 per week, or c.£12,535 per year. The basic state pension will also increase to £184.90 per week.

David adds: ‘It won’t have escaped many pensioners’ attention that the full new SP is right on the cusp of breaking the annual personal income tax allowance that is frozen at £12,570. Many pensioners will be receiving the old rate basic SP which is lower, although some – like those who topped up with SERPS many years ago – will already have a state pension income that exceeds the personal allowance.’

The consultancy LCP has estimated the extra two-year freeze means at least 9.3mn pensioners paying tax, around three quarters of all pensioners, compared with around 8.7mn today. This is also up from 6.7mn in 2021/2022. If inflation or wage growth picks up in the coming years, leading to larger state pension rises, it could mean 10mn pensioners paying income tax by the end of the decade.

David says: ‘What concerns most people is how, if at all, the state pension will be taxed with one Government pronouncement last year suggesting those who exceed the PA with SP income alone, with no other sources of income, will not pay income tax - while those who do so because of private pension income will.  It is unclear whether the Government will consider savings interest or dividend income in this announcement.

‘Currently the state pension will always be paid gross. If you have other PAYE income (e.g., from a private pension or employment), then HMRC will usually adjust the tax code on that income so that tax due is collected through PAYE. But if the state pension is your only income and exceeds the Personal Allowance, the Government has confirmed this increase will not be taxed in the tax year 2026/27, with the intention to extend this dispensation for the remainder of this Parliament.

‘Some retirees who have carefully measured private income so that, together with the state pension, their total annual income stays just the right side of a tax band, might want to check that the c.£575 annual SP increase does not nudge them across that threshold. They might not want to pay a higher marginal rate, but also as noted above, it could also mean they pay higher rates of tax on their investments and lose savings allowances.

‘With the new oil crisis, it now looks very probable that September’s CPI – which is used in the triple lock – will be substantially higher than current official forecasts, so we could be in for a bumper SP increase in the 2027/28 tax year, and that will take the full SP well over the personal allowance.’