The main change for this new tax year (2026/2027) is that the Dividend Tax Rate is increasing by 2%. This means that if you have a Stocks and Shares General Investment account (GIA), then whether you have accumulating or distributing ETFs, you will still need to declare taxable income on ETFs and funds which have a non-zero ERI. The dividend tax is now 10.75% for Basic Rate taxpayers (or 35.75% or 39.35% for higher rate taxpayers).
Income tax thresholds are unchanged:
Income Tax (England, Wales & Northern Ireland)
The Personal Allowance and tax bands remain frozen until at least April 2031.
- Personal Allowance: £0 tax on income up to £12,570.
- Note: This allowance reduces by £1 for every £2 earned over £100,000.
- Basic Rate (20%): On taxable income between £12,571 – £50,270.
- Higher Rate (40%): On taxable income between £50,271 – £125,140.
- Additional Rate (45%): On taxable income over £125,140
Income Tax (Scotland)
Scotland sets its own bands for non-savings and non-dividend income.
- Starter Rate (19%): £12,571 – £16,537.
- Basic Rate (20%): £16,538 – £29,526.
- Intermediate Rate (21%): £29,527 – £43,662.
- Higher Rate (42%): £43,663 – £75,000.
- Advanced Rate (45%): £75,001 – £125,140.
- Top Rate (48%): Over £125,140
Dividend Tax Rates
Capital Gains Tax (CGT)
No change for most people.
- Annual Exempt Amount: Remains at £3,000 for individuals.
- Basic Rate Taxpayers: 18% on gains.
- Higher/Additional Rate Taxpayers: 24% on gains.
- Business Asset Disposal Relief: The rate increases from 14% to 18% starting 6 April 2026
Trustees or personal representatives of deceased individuals pay 24% from 6 April 2026.
Frozen Thresholds: The freezing of the Personal Allowance and basic rate limit at 2025/26 levels is projected to bring nearly 92,000 more individuals into income tax by 2027/28.
ERI
Offshore funds (both accumulating and distributing) may declare Excess Reportable Income each year.
This ERI, under UK law, is taxable (even if earned within an accumulating fund).
The ERI may be different each year and may be 0 or non-zero.
If you held shares on the Reporting Date, then the ERI is deemed as being paid 6 months later on the Distribution Date. The ERI for each year will typically be an amount per share (e.g. if you held x shares of an offshore ETF and the ERI is counted as a dividend, you should declare having received x * ERI on the distribution date).
Some distributing ETFs (e.g. VWRL dist.) may have an ERI of 0 (you need to check each year), whereas the accumulating version (e.g. VWRP acc.) had a 2025 ERI of 2.2479 USD per share (if held 30th June 2025). If you held 10 shares of VWRP (acc.) on 30/6/2025 then you need to declare that you received a dividend of $USD22.479 on 31/12/2025 at whatever rate the $USD was on that date. The ERI for VWRP held on 30/6/2026 has not yet been published. If you don't want to be bothered to have to work out and declare ERI (dividends) on VWRP then you can sell VWRP before 30/6/2026 and buy VWRL instead.
For Basic Rate taxpayers, dividend tax is 10.75% and CGT is 18% or 24%, so it is better (and legally correct) to declare ERI each year (e.g. if holding VWRP acc.) in their annual HMRC tax return and pay dividend tax on it, if required. If they sell VWRP, they can add all ERI declared over all years held, on to the cost price of the VWRP shares - thus reducing the gain (which is taxed at 18%/24%) on the sale.
If you buy distributing ETFs within a GIA, the ERI is typically (but not always) 0 (or it is extremely small - e.g. $USD 0.0024) and typically does not need to be calculated unless you have a very large holding.
Also, since you will be paid dividends on a distributing ETF, it is easy to calculate the tax due on those dividends from the annual tax report and when selling the distributing ETF, there is usually no need to account for ERI (unless it is greater than 0).
Tax Allowances
If you have a 'side hustle' which earns you more than £1000, you will also need to declare this to HMRC. Letting out a furnished room in your home however, is tax free (but if you live alone, you will lose the 25% reduction in Council tax and may have other additional costs such as heating/energy, wear&tear, etc.).
For the 2026/27 tax year, the UK government has maintained several key tax-free allowances while increasing certain tax rates. Below is a breakdown of the current allowances for various income types.
Core Personal Allowances
- Personal Allowance: £12,570.
- This is the standard amount you can earn from all taxable sources combined (wages, pensions, etc.) before paying any Income Tax.
- It reduces by £1 for every £2 earned over £100,000.
- Marriage Allowance: £1,260.
- You can transfer this amount of your Personal Allowance to your spouse or civil partner to save them up to £252 in tax.
Side Hustles & Property
- Trading Allowance: £1,000.
- A tax-free buffer for casual "side hustle" income, such as selling on marketplaces or freelance work.
- If your gross income from these activities is under £1,000, you generally do not need to register for Self-Assessment or pay tax on it.
- Property Allowance: £1,000.
- A separate allowance for income from renting out land or property (excluding the Rent a Room Scheme).
- Rent a Room Relief: £7,500.
- Tax-free limit for letting out a furnished room in your main home.
Savings & Investments
- Personal Savings Allowance (PSA): Based on your tax band.
- Basic Rate (20%): First £1,000 of interest is tax-free.
- Higher Rate (40%): First £500 of interest is tax-free.
- Additional Rate (45%): No allowance.
- Starting Rate for Savings: Up to £5,000.
- Only available if your other taxable income (like salary) is low (below £17,570 total).
- Dividend Allowance: £500.
- The first £500 of dividend income is tax-free. Rates above this have increased to 10.75% (basic rate) and 35.75% (higher rate) for 2026/27.
- ISA Allowance: £20,000.
- Annual limit for total contributions across all Individual Savings Accounts (ISAs). All interest and gains within these remain tax-free.
- Junior ISA (JISA): £9,000 per child.
Capital Gains Tax (CGT)
- Annual Exempt Amount: £3,000.
- The amount of profit you can make from selling assets (like shares or second homes) before CGT is due.
- For Trusts, this is usually £1,500.
Pension Contributions
- Annual Allowance: £60,000.
- The total amount you can contribute to your pension each year with tax relief (capped at your relevant UK earnings).
- Lump Sum Allowance: £268,275.
- The limit on the tax-free lump sum you can typically take from your pension.
SIPPs
For the 2026/27 tax year, Self-Invested Personal Pensions (SIPPs) and Junior SIPPs remain core tools for tax-efficient retirement saving, with rules largely following the standard pension framework.
Many people are not aware of the Junior SIPP. This is a great way to pass wealth over to your grandchildren. Not only is it tax free, but it should show fantastic growth and expose them to the wonders of investing and compound growth. It also means they can't spend their inheritance until they reach retirement age. A Junior S&S ISA is also a great tax-free way to encourage them to invest and provide money for their further education. If you are 16 or 17, you can open your own Junior ISA now!
If you think you may exceed an income tax bracket this year (e.g. exceed £50,270 in England) then putting £ into a SIPP can reduce your income and thus save you some higher rate income tax. If you are retired and under 75, contributing up to £2880 into a SIPP can be very tax efficient.
Adult SIPPs: Key Rules for 2026/27
- Annual Allowance: You can contribute up to £60,000 (or 100% of your relevant UK earnings, whichever is lower) across all your pensions each tax year.
- Non-Earner Limit: If you have no relevant earnings, you can still contribute up to £2,880 net, which becomes £3,600 gross after 20% tax relief.
- Tax Relief:
- Basic Rate: 20% is automatically added to your contribution.
- Higher/Additional Rate: You can claim back an extra 20% or 25% respectively through your Self-Assessment tax return.
- Access Age: The minimum age to access your SIPP is currently 55, but this is confirmed to rise to 57 on 6 April 2028.
- Tax-Free Cash: You can usually take up to 25% of your pot as a tax-free lump sum, capped at £268,275.
- Carry Forward: You may be able to "carry forward" unused allowances from the previous three tax years to make a larger contribution, provided you were a member of a pension scheme in those years.
Junior SIPPs: Key Rules for 2026/27
- Contribution Limit: The maximum gross contribution is £3,600 per tax year.
- This means a parent, guardian, or relative can pay in up to £2,880, and the government adds £720 in tax relief.
- Eligibility & Management:
- Must be opened by a parent or legal guardian for a child under 18.
- Management of investments stays with the adult until the child reaches 18, at which point control passes to the child.
- Access: Even though the child takes control at 18, they cannot access the funds until the minimum pension age (currently 55, rising to 57 in 2028).
- Inheritance Tax (IHT): Contributions to a Junior SIPP are generally treated as "gifts" for IHT purposes. They can fall under the £3,000 annual gifting allowance or the "normal expenditure out of income" rule.
- Note: From April 2027, most unused pension funds are expected to be included in an individual's estate for IHT.
Comparison: SIPP vs. Junior SIPP
| Feature | Adult SIPP | Junior SIPP |
|---|---|---|
| Max Annual Limit | £60,000 (or 100% earnings) | £3,600 (gross) |
| Who can contribute | Self or Employer | Anyone (parents, grandparents, etc.) |
| When is it accessible | Age 55 (57 from 2028) | Age 55 (57 from 2028) |
| Growth & Tax | Tax-free growth; 25% tax-free at exit | Tax-free growth; 25% tax-free at exit |
Junior ISAs
For the 2026/27 tax year, a Junior Stocks and Shares (S&S) ISA allows you to invest for a child's future while shielding all growth and income from UK tax.
Core Contribution Rules
- Annual Allowance: The limit remains £9,000 for the 2026/27 tax year.
- This is a shared limit across both Cash and Stocks & Shares Junior ISAs.
- Unused allowance does not roll over to the next tax year.
- Who Can Contribute: Anyone (grandparents, friends, etc.) can pay into the account once it is open.
- Who Can Open: Only a parent or legal guardian can open the account for a child under 16.
- 16 and 17-year-olds can open their own Junior ISA.
Account Management & Access
- Ownership: The money legally belongs to the child, not the person who contributes.
- Withdrawals: Funds are locked until the child's 18th birthday.
- Exceptions only apply in cases of terminal illness or the death of the child.
- Control: The child can take over management of the account at 16, but still cannot withdraw funds until 18.
- At Age 18: The account automatically converts into an adult Stocks and Shares ISA, and the child gains full access to the funds.
Tax Benefits
- Tax-Free Growth: No Capital Gains Tax (CGT) is due on any investment profits.
- Tax-Free Income: No Income Tax is paid on dividends or interest earned within the wrapper.
- Parental Settlement Rule: Unlike standard savings accounts, income from a Junior ISA does not count towards the parent's tax liability, even if the parent provided the funds.
- Inheritance Tax: Contributions are usually treated as gifts and may help reduce a future Inheritance Tax bill.
Eligibility Constraints
- Residency: The child must be a UK resident (unless they are a dependant of a Crown servant).
- Child Trust Funds (CTFs): A child cannot have both a Junior ISA and a CTF. If they have a CTF, it must be transferred into the Junior ISA.
- Account Limits: A child can only have one Junior Cash ISA and one Junior Stocks and Shares ISA at any time
Retirement Scenario
You are 66 and retired. Your gross pension income is £55k as you have both a work/private pension and a state pension (and maybe a small side hustle). Here is what happens if you open and contribute some of your pension income (£2880 which is max if not earning) into a SIPP until you are 75.
- Total Income: £55,000
- Adjusted Threshold: £53,870
- Remaining in 40% Band: £1,130.
9-Year Total Breakdown
| Benefit Type | Annual Amount | 9-Year Total (Age 66–75) |
|---|---|---|
| Basic Rate Relief (added to SIPP pot) | £720 | £6,480 |
| Higher Rate Relief (tax bill reduction) | £720 | £6,480 |
| Total Tax Benefit | £1,440 | £12,960 |
Also, if you are a higher rate taxpayer, you must claim the higher rate relief from HMRC (e.g. via Self-assessment tax return).
Key Rules to Note
- The Age 75 Deadline: SIPP contributions can only receive tax relief until the individual's 75th birthday.
- Earnings Requirement: Generally, you can only get tax relief on contributions up to 100% of your relevant UK earnings.
- Crucial Detail: Most pension income does not count as "relevant UK earnings." However, everyone is entitled to contribute and receive relief on up to £3,600 gross (£2,880 net) per year regardless of earnings.
- Future Access: When the funds are eventually withdrawn, 25% is usually tax-free, while the remaining 75% is taxed as income.
Note that after April 2027, SIPPs will be included in IHT calculations.
Please ask an independent financial advisor before making any significant changes. I am not a financial advisor and your individual circumstances may vary.
No comments:
Post a Comment