UK Income Tax Reliefs Ordering 2027/28 — Allowances Explained

From the 2027/28 tax year, the UK Income Tax calculation changes the order in which certain allowances and reliefs are used. Where possible, Step 2 and Step 3 allowances and reliefs must first be deducted from income that is not property income, savings income or dividend income. Any remaining amount is then applied to the relevant property, savings or dividend income under the statutory calculation.

This matters most when you have a mixture of employment, pension or trading income alongside rent, savings interest or dividends. The change does not give you an extra allowance and does not make every relief available to every taxpayer. It changes the calculation sequence, alongside the separate 2027/28 rates for property and savings income. Read the UK Tax Changes 2027/28 guide for the wider package and the Savings Interest Tax 2027/28 guide or Property Income Tax Rates 2027/28 guide for the income-specific rates.

What is the new relief-ordering rule?

Finance Act 2026 changes the Income Tax calculation for 2027/28 and later tax years. The statutory order for the relevant income categories is broadly:

1. income that is not property income, savings income or dividend income;
2. property income;
3. savings income; and
4. dividend income.

The legislation also requires specified allowances and reliefs deducted at Steps 2 and 3 to be used against non-property, non-savings and non-dividend income first, so far as that is possible. If the allowance or relief is larger than that income, the remaining amount is then applied within the rest of the calculation according to the rules.

The wording is technical because different reliefs enter the calculation at different steps. A salary, pension, trading profit, rent, bank interest and dividend are not interchangeable lines on a tax return. The correct outcome depends on the type of relief, the type of income and the taxpayer's wider facts.

Why the order can matter

The income tax calculation is progressive. A relief used against one income category can leave another category exposed to a different rate. From 2027/28, this interacts with the separate rates for property and savings income:

The table is not a substitute for a tax computation. It shows why a person with only salary may notice little from the ordering rule, while someone with salary plus rent, interest or dividends may need to revisit their estimate.

What the rule does not change

The reform does not by itself:

• increase the standard Personal Allowance;
• turn savings or dividends into employment income;
• make a relief available when its qualifying conditions are not met;
• change National Insurance treatment of property, savings or dividend income;
• allow residential mortgage interest to be deducted as an ordinary property expense; or
• merge Scottish Income Tax with the rates that apply in England, Wales or Northern Ireland.

It also does not mean that every deduction is simply placed against salary. The statute specifically addresses allowances and reliefs deducted at the relevant calculation steps. Pension contributions, Gift Aid, losses, finance-cost tax reductions and specialist reliefs can have their own rules and should not be moved casually between categories.

A simple mixed-income illustration

Suppose a taxpayer has employment income and savings interest and is eligible for an allowance that can be used in the relevant Income Tax calculation. Under the 2027/28 ordering rule, the calculation first uses the available allowance against the non-property, non-savings and non-dividend income where possible. Only any remaining amount is considered against property, savings or dividend income under the statutory sequence.

This illustration intentionally does not state a final tax bill. The result would also depend on the taxpayer's Personal Allowance, tax residence, rate bands, Personal Savings Allowance, pension contributions, Gift Aid, other reliefs and whether the interest is within the starting-rate rules. A headline calculation that subtracts the allowance from whichever income has the highest rate can therefore be misleading.

The practical lesson is to provide all income sources and reliefs to the same calculation. Do not calculate salary tax, rental tax and dividend tax as three isolated mini-returns and add them together.

Landlords: ordering is separate from property-profit rules

The new ordering rule does not replace the property business calculation. A landlord must still establish receipts, allowable expenses, carried-forward property losses and any property allowance decision before arriving at property income for the Income Tax calculation.

Residential finance costs also remain a separate issue. Individual landlords generally receive a tax reduction rather than deducting residential mortgage interest as an ordinary expense. From 2027/28, the relevant property basic rate for that reduction is 22%, but the relief-ordering reform should not be described as a new mortgage-interest deduction.

Use the Property Income Calculator→ with the taxpayer's other income, then read the UK Property Income Tax Rates 2027/28 guide for the separate property rules.

Savers and shareholders: allowances still have their own rules

The new sequence does not remove the Personal Savings Allowance, the starting rate for savings or the dividend allowance. Those allowances answer different questions from the order in which Step 2 and Step 3 reliefs are deducted.

For 2027/28, savings income has separate rates of 22%, 42% and 47% under the published legislation and technical note. Dividend income remains a separate category with its own rates and allowance. The order can affect where available reliefs are used, but it does not turn the Personal Savings Allowance into a general deduction or make dividends tax-free.

Read the Savings Interest Tax 2027/28 guide and the Dividend Allowance 2026/27 guide for the relevant allowances and rates.

How to prepare for the 2027/28 calculation

Frequently Asked Questions

A worked review without inventing a tax bill

Imagine a taxpayer with salary, a small trading profit, bank interest, rent and dividends. The correct workflow is not to apply one allowance to the largest-looking figure. First establish each source under its own rules. Employment starts with the P60 and benefits; trading starts with turnover and allowable expenses; property starts with receipts, expenses and finance-cost treatment; savings and dividends start with gross certificates and vouchers. Only then can the wider Income Tax sequence be applied.

The taxpayer should keep two columns in the working paper: statutory income and tax already collected. PAYE deducted from salary is not a relief. A bank's tax deduction, where one exists, is not proof that the interest has been calculated under the correct savings rules. Likewise, a company dividend is not a deductible expense of the company and should not be treated as one in the shareholder's personal calculation.

If a relief exceeds the first income category to which it can be applied, record the unused balance and follow the statute for the next category. If it cannot be used, record that outcome rather than forcing it into property or dividend income. This makes the result auditable and helps explain why a simple online estimate may differ from the HMRC calculation.

A safer review process for mixed income

The ordering rule is easiest to apply when the evidence is assembled before the arithmetic. Start with the tax year and the date on which each item arose. A pension contribution paid after the tax year, a Gift Aid payment carried back by election, or a relief connected with an earlier loss may not belong in the same working paper as the current-year income. Keep the payment date, provider statement and any election together.

Next, separate gross income from tax already deducted. A P60 or P45 records PAYE withholding; it does not replace the calculation of taxable income. Bank statements and interest certificates should show whether figures are gross or net. Dividend vouchers should be retained even where the dividend allowance means no tax is payable, because dividends still count when deciding which rates and bands apply.

For property, retain the rental statement, expense schedule, finance-cost evidence and loss history. Do not use the ordering change to turn a capital cost into an income deduction. For a company shareholding, keep dividend vouchers and the date of each distribution. For employment, reconcile the P60, benefits, pension entries and tax code rather than copying a single payslip figure.

Finally, compare the result with HMRC's calculation and record the reason for any difference. A difference may be a missing relief, a timing choice, a gross-versus-net error, or a rule that the calculator does not model. The right response is to identify the input or statutory step, not to force the output to match a preferred tax bill.

Official sources

• Income Tax rates and allowances for 2027/28
• HMRC technical note on the ordering of income tax reliefs
• Self Assessment tax returns

For a wider 2027/28 view, read the UK Tax Changes 2027/28 guide. If you have rental income, use the Property Income Calculator→; if you have savings or dividends, compare the relevant rates and allowances before relying on a single-income estimate.

Official sources

• UK Parliament: Finance Act 2026
• HMRC: Property, savings and dividend income technical note
• HM Treasury: Budget 2025
• HMRC: Income Tax rates and allowances
• HMRC: Income Tax reliefs and allowances in Self Assessment
• HMRC: Income Tax reliefs ordering
• GOV.UK: Self Assessment tax returns

These Parliament, HM Treasury and HMRC sources are the official references for the 2027/28 relief ordering, rates, technical notes and filing context. Check enacted legislation and current HMRC guidance before filing.