Government Quietly Confirms Significant Change to Personal Tax Reliefs
While the headlines from last week’s Budget focused on the forthcoming increases to income tax on property, savings and dividend income, a more technical but equally important change slipped through in the background. For many individuals, this adjustment will alter how effectively they can use their personal allowances and reliefs from 2027 onwards.
A Less Obvious Blow for Taxpayers
At present, taxpayers have some flexibility in choosing how their personal allowance is allocated across different sources of income. This can be particularly valuable for individuals with a mixture of earnings, rental profits, dividends or savings income, allowing them to minimise tax by prioritising the allowance where it produces the greatest benefit.
The Budget documents confirmed that this flexibility is set to disappear. From April 2027, the tax calculation rules will be rewritten so that the personal allowance frozen at £12,570 until at least 2031 must be set against non-savings, non-dividend income first. Only once it has been applied there will any remaining allowance be used against property, savings or dividend income.
What Else Is Affected?
The change doesn’t stop at the personal allowance. Other reliefs deducted at steps 2 and 3 of the tax computation will follow the same ordering rules. This includes:
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Blind Person’s Allowance
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Married Couple’s Allowance
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Trading losses
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Certain pension contributions
Reliefs that are specific to a particular type of income will continue to be applied to that income first, but taxpayers will no longer be able to optimise the order in which general allowances are used.
Why It Matters
The loss of flexibility may not be immediately obvious to many taxpayers, but it could have a meaningful impact on effective tax rates especially for individuals with significant investment income or rental profits. By forcing allowances to be used in a fixed order, the government is quietly reducing the scope for legitimate tax planning and potentially increasing tax liabilities for those with diverse income streams.