What income tax rate applies to a discretionary trust in the UK?

Full answer

**Why discretionary trusts pay higher tax** Discretionary trusts are taxed at the additional-rate equivalent because the trustees have discretion over who receives income — meaning income could otherwise be retained and attributed to high-earning settlors. The high trust rate ensures income is effectively taxed even before distribution. **The £1,000 standard rate band** The first £1,000 of trust income each year is taxed at the standard rate: - Non-savings/savings income: 20% - Dividends: 8.75% Above £1,000, the higher trust rates apply. **Trust tax rates 2026/27** | Income type | Standard rate band (first £1,000) | Trust rate above £1,000 | |---|---|---| | Non-savings income | 20% | 45% | | Savings income | 20% | 45% | | Dividends | 8.75% | 39.35% | **Example: The Smith Family Discretionary Trust** The trust receives £8,000 rental income in 2026/27. - First £1,000 at 20% = £200 - Next £7,000 at 45% = £3,150 - Total trust income tax: £3,350 (effective rate: 41.9%) **Distribution to beneficiaries** When trustees distribute income to a beneficiary, that income carries a 45% tax credit. The beneficiary declares the gross income and credit. If the beneficiary is a basic-rate taxpayer: - Gross income: £5,000 (from £2,750 net + 45% credit) - Beneficiary's income tax (20%): £1,000 - Tax credit: £2,250 - Refund due to beneficiary: £1,250 **The £1,000 band split across multiple trusts** If the same settlor creates multiple trusts, the £1,000 standard rate band is divided between them, with a minimum of £200 each trust (so max 5 trusts sharing the band). **Capital gains in trusts** Discretionary trusts have an annual CGT exempt amount of half the individual exempt amount: £1,500 in 2026/27 (half of £3,000). CGT rates on assets are the same as individual rates (18% or 24%).

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