Trustees of a discretionary or accumulation trust pay income tax at 45% on most income and 39.35% on dividends for 2026 to 2027, unless the trust’s income is no more than £500, in which case none of it is taxed. The old £1,000 standard rate band was abolished from 6 April 2024. Every income payment to a beneficiary carries a 45% tax credit, and the trustees must have paid enough tax, tracked in the tax pool, to cover it or pay the shortfall themselves.

Which trusts pay the special trust rates?

Section 479 of the Income Tax Act 2007 applies the special rates to accumulated or discretionary income arising to trustees, other than under a charitable trust. In practice that means trusts where the trustees can choose whether to pay income out, to whom, or to add it to capital. Trustees of an interest in possession trust pay basic rate tax instead, and bare trust income is taxed on the beneficiary; the differences are set out in types of trust and how each is taxed.

Trusts for a disabled person or a bereaved minor can qualify for special tax treatment; see vulnerable beneficiary trusts.

What rates apply for 2026 to 2027?

Income Rate
Dividend type income (dividend trust rate) 39.35%
All other income (trust rate) 45%
Dividend income used to pay trust management expenses 10.75%
Other income used to pay trust management expenses 20%

The dividend rate on income used for expenses rose from 8.75% to 10.75% from 6 April 2026; the 45% and 39.35% rates are unchanged. Trustees do not get the dividend allowance. Finance Act 2026 adds a property trust rate and a savings trust rate, each 47%, from 2027 to 2028. Some receipts that are not income in trust law, such as gains on life insurance policies and lease premiums, are taxed as income at these rates.

What happened to the standard rate band?

From 2006 to 2007 until 2023 to 2024, section 491 stopped the special rates applying to the first £1,000 of income that would otherwise be taxed at them. That slice was taxed at the basic rate or dividend ordinary rate instead. Under section 492 the band was divided by the number of settlements made by the same settlor, down to a floor of £200 (TSEM3012).

Finance (No. 2) Act 2023 omitted that Chapter of the Act for 2024 to 2025 onwards. Trustees now pay the full special rates on every pound once income exceeds the £500 threshold. Old computations, tax pool records and software templates that still show a £1,000 band at 20% are out of date.

How does the £500 tax free amount work?

Section 24B of the Income Tax Act 2007 treats trustees’ net income as nil if it is no more than the de minimis trusts amount. It is a threshold, not an allowance: if net income is £501, all £501 is taxed.

The amount is £500, reduced where the same settlor has other qualifying settlements. The reduced figure is £500 divided by the number of those other settlements plus one, but never below £100. So a settlor with three discretionary trusts gives each a threshold of about £166.67, and five or more gives £100 each. Only trusts with income chargeable at the special rates count. Settlor interested trusts, vulnerable beneficiary trusts, heritage maintenance funds and pension trusts are left out. Where a trust has more than one settlor, the lowest threshold applies.

The threshold does not stop a charge on distributions. Section 24B does not affect the tax pool charge on payments to beneficiaries, so paying out income that was never taxed still costs the trustees the full 45% credit.

How do trust management expenses change the tax?

Trust management expenses do not reduce taxable income, but income used to pay them is taken out of the special rates and taxed at 20% or 10.75% instead. Expenses are set against dividend income first, then other income. Only expenses that relate directly to trust income qualify, such as preparing the income tax return or deciding on and making income payments. Investment advice, changing investments and most legal costs are capital expenses and do not qualify; HMRC’s Helpsheet 392 lists them.

The lower rate saves tax, but that tax does not enter the tax pool, which can cause a shortfall later.

How does the tax pool work?

Under section 494, a discretionary payment of income is treated as made after deducting tax at the 45% trust rate on the grossed up amount. The beneficiary is treated as having paid that tax (or the settlor, where the payment is taxed on a parent under the rules for a settlor’s minor children). The beneficiary reports it from form R185 and can reclaim some or all of it if they are a non taxpayer or pay tax at 20% or 40%; see form R185.

Section 497 sets out the pool. Start with last year’s pool, take off the credits on last year’s payments (not below nil), and add this year’s qualifying tax. Section 498 lists what qualifies: tax charged at the dividend trust rate or the trust rate, the trust rate minus basic rate part of tax on chargeable event gains, and tax computed under the vulnerable beneficiary rules. Tax paid while the trustees are non resident, and tax paid by trustees of a settlor interested trust, never enters it (TSEM3021).

If the credits on the year’s payments exceed the pool, section 496 charges the difference on the trustees through the trust and estate tax return; see the SA900 return. If the return is filed by 31 October and HMRC calculates the tax, it also works out the pool from the payments listed at question 14.

Why do shortfalls arise?

HMRC’s guidance gives three main causes:

  • income within the £500 threshold, which pays no tax and adds nothing to the pool;
  • income taxed below 45%, mainly dividends at 39.35% and income used for expenses; and
  • chargeable event gains, where only 25% enters the pool.

Illustration only. Three discretionary trusts each have no pool brought forward and pay out all their net income in 2026 to 2027.

Trust Income Tax paid (pool) Net paid out 45% credit Extra tax
A £10,000 interest £4,500 £5,500 £4,500 Nil
B £10,000 dividends £3,935 £6,065 £4,962.27 £1,027.27
C £400 interest Nil £400 £327.27 £327.27

Trust B’s payment grosses up to £11,027.27 (£6,065 multiplied by 100 over 55). Trust C’s income was under £500, so no tax was paid when it arose, but the distribution still triggers the full credit.

How much can trustees safely distribute?

HMRC’s worked example (TSEM3024) shows that, with no pool brought forward, trustees can pay out 55% of income after expenses and keep the books balanced. In Trust B that is £5,500. The credit is £4,500, the pool holds £3,935 and the trustees pay a further £565. Total tax is £4,500 and the beneficiary receives £5,500, so the £10,000 is fully accounted for. A surplus pool from earlier years can be used to pay out more.

Where a payment goes to the settlor’s own minor child, the 45% credit is treated as paid by the settlor, and the income is taxed as theirs; see the parental settlements rule.

What mistakes come up most often?

  • Distributing all the net dividend income and leaving the trustees with a section 496 bill and no cash to pay it.
  • Treating the £500 as an allowance, or assuming income under it can be paid out free of tax.
  • Still applying the £1,000 standard rate band, abolished from 6 April 2024.
  • Claiming capital expenses, such as investment advice or the cost of changing investments, as trust management expenses.
  • Not carrying the pool forward correctly, or forgetting that tax paid while non resident does not count.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.