TL;DR
From April 2027, HMRC will apply the £12,570 Personal Allowance to earned income first: salary, self-employment and pensions. Only the leftover, if any, can be set against rental income, savings interest and dividends. The allowance amount is not changing, but people with mixed income could see a higher bill.
Last reviewed: 14 May 2026
Key facts
- Personal Allowance stays at £12,570 for 2026/27 and is frozen to 2031.
- The allocation change is expected to start in April 2027, not 2026/27.
- Earned income (pay, pensions, self-employment) gets the allowance first.
- Rental, savings and dividend income only get any remaining allowance.
- It runs alongside planned 2 percentage point rises on some unearned income.
What is actually changing
The Personal Allowance is the slice of income most people can receive before Income Tax applies. For 2026/27 it remains £12,570. What changes from April 2027 is not the figure but the order in which HMRC sets it against different types of income.
At present HMRC generally allocates the allowance in the way that produces the lowest overall tax bill. Someone with a small salary and large dividend income may currently see much of the allowance used against the dividends. From April 2027 the allowance is applied to employment income, self-employment profit and pension income first. Anything left over can then be used against property income, savings interest and dividends.
Who is most affected
People with a single PAYE salary and no other income see no practical difference. The impact falls on those with mixed income: landlords, investors holding assets outside ISAs and pensions, and company directors who take a small salary plus dividends.
For these groups, more of the unearned income can become taxable because the allowance has already been absorbed by earnings. In some cases that can also push income into a higher tax band.
Why the government is doing it
The stated aim is to bring the tax treatment of income from assets closer to the tax treatment of income from work. Freezing thresholds to 2031 already pulls more income into tax over time as wages rise, an effect known as fiscal drag. Reordering the allowance is a further step in the same direction.
What people with mixed income can review now
There is no action required for 2026/27, since the change starts the following tax year. People with rental or investment income may want to understand how much of their allowance is currently set against unearned income, so the April 2027 shift is not a surprise. Using tax-efficient wrappers such as ISAs and pensions can reduce how much income sits outside them in the first place.
How the timing fits the wider tax calendar
The 2026/27 tax year runs from 6 April 2026. The allocation rule is expected to apply from 6 April 2027. Income Tax thresholds remain frozen across this period, and the dividend rate rise applies from April 2026, so 2026/27 itself already carries changes for investors even before the allocation rule begins.
Related guides
Frequently asked questions
Is the Personal Allowance being cut?
No. It stays at £12,570 for 2026/27 and is frozen at that level to 2031. Only the order in which it is applied to different income types changes, from April 2027.
When does the allocation change take effect?
It is expected to apply from 6 April 2027, the start of the 2027/28 tax year, after the end of 2026/27.
I only have a salary. Does this affect me?
No. If your only income is employment income covered by PAYE, the allowance is already applied to that income, so the reordering makes no practical difference.
I am a landlord. What changes for me?
If you also have earned income, the allowance is set against the earned income first. Less of it, or none of it, may be left for your rental income, which can increase the tax due on that rent.
Does this change dividend tax rates?
No. The rate change on dividends is separate and applies from April 2026. The allocation rule changes which income the allowance covers, not the rates themselves.
