On the 25th November 2025, HMRC quietly published a guidance document on their website which, by and large, went unnoticed by the general public and initially by many in the accountancy profession. This document, not mentioned by Rchel Reeves in her Budget speech just a few weeks earlier, was a tax bombshell which I’m guessing ‘Dear Rachel’ hoped to slip out without anyone noticing.
The tax increase amounts to a stealth tax and one with profound implications for many, especially for those reliant on dividend income, which was effectively raised by nearly 25%, from 8.75% to 10.75%,
HMRC’s explanation for the tax grab
The HMRC document blithely stated that they were raising rates of tax on savings, dividends and property income to ensure income from assets is taxed more fairly. They went on to explain that the government (HMG) felt it was unfair that anyone with property, savings or dividend income should pay less tax than those whose income comes from PAYE or self-employment.
Their basic justification for the tax grab is that HMG has decided to increase taxes in these areas to help to narrow this gap between tax paid on income derived from working and ‘other’ income, as whilst tax is paid on income from assets, that income is not subject to National Insurance.
Most of the changes will kick in from April 2027, with your £12,570 Personal Allowance being set against your employment, trading or pension income first. The only good news is that the increases in tax will not impact on the various structural allowances, including the dividend allowance, personal savings allowance and property allowance.
How will the three sectors be affected
The changes to the three sectors, are slightly different, with the only common feature being that income from any of these sources will rise by a minimum of 2%.
1.Savings: All savers have what is known as a PSA (Personal Savings Allowance). This currently stands at £1,000pa (reduced to £500 for higher-rate taxpayers), above which all of your savings interest is subject to income tax. Any interest that exceeds your PSA is currently charged at your usual rate of income tax (20%, 40% or 45%), but from April 2027 there will be a 2% surcharge payable.
As income tax thresholds have been frozen since 2021 and will remain so until at least 2031, more and more individuals are being dragged into a higher tax band each year. HMRC data shows there is around 8 million higher-rate taxpayers this tax year, an increase of more than 4 million since 2021, with this figure estimated to be around 10 million by 2031. Plus, the number of additional-rate taxpayers (income over £125k) has more than doubled to 1½ million in the same period.
The only good news is that lower-income savers can still earn up to £5,000 in savings income tax-free, provided you earn less than £17,570 from other sources. The allowance is reduced by £1 for every £1 of other income you earn above the £12,570 personal allowance.
2.Dividends: The tax on dividend income will increase by 2%, which on the ordinary rate sees rises from 8.75% to 10.75%, on the upper rate from 33.75% to 35.75%, but strangely they haven’t increased the rate for additional rate taxpayers. The sting in the tail was that at the last minute, the start date for this increase was brought forward by one year to April 2026.
3.Property income: HMRC taxes property rental income based on your net profit after allowable expenses; but don’t forget, there is a Property Allowance, which means that the first £1,000 of property income remains tax-free. However, from April 2027 a 2% surcharge will be applied with the basic rate rising to 22%, the higher rate to 42% and the additional rate to 47%.
What do the changes mean for employees, the self-employed and pensioners?
Apparently, the government is not planning any immediate changes to the tax rates on employment, self-employment and income from pensions. The changes announced only impact on the three areas of income from property, savings or dividends. The majority of taxpayers with no taxable savings, dividend or property income are highly unlikely to pay any more tax as a result of these changes
Pensioners, along with the rest of the population, will only pay additional tax if they have taxable income from property, savings and dividends, outside of ISAs and above their allowances. The government blandly stating that the majority of pensioners will pay no more tax as a result of these changes, ignoring the self-evident fact the very few OAP’s can survive on the tax-free state pension and rely on the interest on savings and other minor supplementary incomes, just to survive.
Is the government expecting a tax windfall next year?
HMRC have said that based on their projections, that they expect an increased tax yield of around £2½ billion per year by the 2029–30 tax year. They’ve also said that their projections show that two-thirds of this extra tax will be paid by the top 20% of households.
My many years of experience of HMRC’s projections on tax income tell me that not only do they invariably over-estimate the amount of tax they will collect, but also that the heaviest impact tends to be on those taxpayers at the bottom end of the income scales, namely pensioners!
Accountant’s view
These tax rises have been signalled for a number of years with the only question being, not if they will be introduced but when and at what rate. Well now we know and it isn’t good news.
