Trust Income Tax UK (2026): How Are Trusts Taxed on Income — Rates, Standard Rate Band, and Trustee Pool

The income tax rates payable by trustees depend on the type of trust and the type of income received: (1) DISCRETIONARY TRUSTS — THE TRUST RATE: trustees of DISCRETIONARY TRUSTS pay income tax at the TRUST RATE on income above the standard rate band: (a) NON-DIVIDEND INCOME (rent, interest, trading profits): 45% trust rate; (b) DIVIDEND INCOME: 39.35% trust dividend rate; (c) WITHIN THE STANDARD RATE BAND (first £500 of income — see below): 20% on non-savings income; 20% on savings income; 8.75% on dividends; (2) INTEREST IN POSSESSION TRUSTS (QUALIFYING IPDI): trustees of a trust in which a beneficiary has an immediate entitlement to the income (a qualifying interest in possession) pay income tax at BASIC/SAVINGS RATES — not the trust rate. The income is treated as the beneficiary's income. The beneficiary's personal allowance and other tax reliefs apply: (a) non-savings income: 20% basic rate; (b) savings income: 20% savings rate; (c) dividend income: 8.75% basic dividend rate (or higher if the beneficiary is a higher-rate taxpayer — the beneficiary claims the credit); (3) BARE TRUSTS: in a bare trust, the beneficiary is absolutely entitled to the trust assets and income. The income is treated as the BENEFICIARY'S OWN INCOME — the beneficiary (not the trustee) is directly liable for income tax on it. The trustees have no separate income tax liability. The beneficiary's personal allowance, basic rate band, and other reliefs apply; (4) ACCUMULATION AND MAINTENANCE TRUSTS AND TRUSTS FOR BEREAVED MINORS: these now broadly follow the rules for discretionary trusts — trust rate applies above the standard rate band.

The STANDARD RATE BAND for trusts is a small slice of income on which trustees of discretionary trusts do NOT pay the full trust rate: (1) THE AMOUNT (2026/27): the standard rate band for a trust is £500 per year. (This was reduced from £1,000 to £500 with effect from 6 April 2024 by the Finance Act 2023.) On the first £500 of income, trustees pay income tax at the BASIC RATES: (a) 20% on non-savings income; (b) 20% on savings income; (c) 8.75% on dividend income; (2) ABOVE £500: income above the £500 standard rate band is taxed at the full TRUST RATE of 45% (non-dividend) or 39.35% (dividends); (3) SPLITTING THE STANDARD RATE BAND BETWEEN MULTIPLE TRUSTS: if the SAME SETTLOR has created multiple trusts, the £500 standard rate band is DIVIDED between all trusts settled by that settlor. With two trusts, each gets £250. With three trusts, each gets £167 (rounded). This anti-avoidance rule prevents a settlor from creating many small trusts to benefit repeatedly from the standard rate band; (4) THE MINIMUM: even after splitting, the standard rate band cannot fall below £200 per trust. If the full calculation would give each trust less than £200, each trust gets a minimum of £200; (5) PRACTICAL IMPACT: for a discretionary trust with modest income (say, £600 per year from interest), the trustees pay 20% on the first £500 (= £100 tax) and 45% on the remaining £100 (= £45 tax). Total tax = £145. Without the standard rate band, the full £600 would be taxed at 45% (= £270); (6) COMPARISON WITH INDIVIDUALS: an individual has a personal allowance of £12,570 (2026/27) before paying any income tax. A trust has only £500 in the standard rate band — and this is taxed at 20%, not at 0%. Trusts are therefore significantly disadvantaged compared to individuals for income tax purposes.

The TRUSTEE POOL (sometimes called the 'tax pool') is the mechanism used to track how much income tax the trustees have paid at the trust rate, so that when distributions are made to beneficiaries they can be grossed up correctly: (1) BUILDING UP THE POOL: every year, when trustees of a discretionary trust pay income tax at the trust rate (45%) on income above the standard rate band, the difference between the TRUST RATE TAX and the BASIC RATE TAX (20%) is credited to the tax pool. For example: (a) trust has £2,000 of non-savings income above the standard rate band; (b) trust rate tax payable: £2,000 × 45% = £900; (c) basic rate equivalent: £2,000 × 20% = £400; (d) additional tax (added to pool): £900 − £400 = £500; (2) DISTRIBUTIONS TO BENEFICIARIES — R185 CERTIFICATE: when trustees make an INCOME DISTRIBUTION (payment of income) to a beneficiary under a discretionary trust, the distribution is treated as if the beneficiary received it GROSS with a 45% tax credit deducted. The trustee must issue an R185 Trust Income certificate to the beneficiary showing: (a) the gross income equivalent; (b) the 45% tax credit; (3) THE POOL MUST COVER THE DISTRIBUTION: the tax pool must contain ENOUGH TAX to cover the notional 45% tax credit attached to the distribution. If the distribution would create a 45% tax credit that exceeds the pool, the trustees must make a PAYMENT TO HMRC to top up the pool; (4) BENEFICIARY RECLAIMS EXCESS TAX: when the beneficiary receives the R185 certificate, they: (a) include the grossed-up income in their own Self Assessment; (b) claim credit for the 45% tax paid by the trustees; (c) if they are a basic-rate taxpayer, they reclaim the DIFFERENCE between the 45% credit and their own tax rate (20%) as a refund from HMRC; (5) ANNUAL REPORT — SA900: trustees must complete and file a trust and estate Self Assessment return (SA900) annually — reporting all trust income, the income tax calculated, and any distributions made.

Trustees of most trusts with income or gains have formal annual reporting obligations: (1) SA900 TRUST AND ESTATE TAX RETURN: trustees must file an SA900 if the trust: (a) has income arising in the tax year; (b) makes a chargeable gain; (c) is required to register with HMRC. The SA900 must be filed by 31 January following the tax year (for online filing) or 31 October (for paper filing). Penalties apply for late filing; (2) TRUST REGISTRATION SERVICE (TRS): all UK trusts with tax consequences (income tax, CGT, IHT) must register with HMRC's Trust Registration Service online. Non-UK trusts that acquire UK land or have UK-resident trustees must also register. Failure to register attracts penalties. See the trust-registration-service-uk guide; (3) SA905 — TRUSTEES' STATEMENT: the SA905 supplementary form (Trusts etc.) is filed alongside the SA900 to provide details of income distributions to beneficiaries and the R185 certificates issued; (4) CERTIFICATE R185 — TRUST INCOME: trustees who make income distributions to beneficiaries under a discretionary trust must issue an R185 (Trust Income) certificate to each beneficiary, detailing the gross income and tax credit. Beneficiaries use the R185 to complete their own Self Assessment or reclaim excess tax; (5) EXEMPTIONS — SMALL TRUSTS AND BARE TRUSTS: a trust that has no income, no chargeable gains, and does not need to register may not need to file an SA900. Bare trusts where the beneficiary is directly taxable on the income generally do not have a trustees' SA900 obligation (though the beneficiary reports the income on their own return). HMRC may still require registration on TRS; (6) CORPORATION TAX — NOT APPLICABLE: UK trusts (other than unit trusts) are not subject to corporation tax. Trustees are taxed under income tax rules — not the corporation tax regime.

An INTEREST IN POSSESSION (IIP) trust is a trust where one or more beneficiaries (the life tenants) have an immediate, current RIGHT to the income of the trust as it arises. This is fundamentally different from a discretionary trust where the trustees decide whether and to whom to distribute income: (1) INCOME TREATED AS THE BENEFICIARY'S: in an IIP trust, the income of the trust is treated as the INCOME OF THE LIFE TENANT for income tax purposes — even before it is actually distributed. The trustees are not taxed at the trust rate on that income. Instead, the life tenant reports the income in their own Self Assessment; (2) TRUSTEES COLLECT AND PAY OVER: in practice, trustees of an IIP trust collect the income (rents, dividends, interest) and pay it over to the life tenant. The trustees pay income tax at basic rate on the way through (20% on non-savings; 20% on savings; 8.75% on dividends) and pass on a net amount. The life tenant then claims credit for the basic rate tax already deducted and — if they are a higher-rate or additional-rate taxpayer — pays the additional tax; (3) NO TRUST RATE — NO TAX POOL: because the income is treated as the life tenant's own income, there is NO trust rate and NO trustee tax pool for an IIP trust. The life tenant can use their personal allowance, ISA income, and other tax reliefs against the trust income; (4) LIFE TENANT'S PERSONAL ALLOWANCE: the life tenant's income from the IIP trust is aggregated with their own income. If the life tenant's total income exceeds the personal allowance (£12,570 for 2026/27), the excess is taxed at their marginal rate — 20%, 40%, or 45%; (5) COMPARISON SUMMARY: DISCRETIONARY TRUST: trustees pay 45%/39.35% above £500 band; tax pool; R185 certificate on distributions; beneficiary reclaims excess. IIP TRUST: trustees collect at basic rates; life tenant is taxed at their own marginal rate on all income; personal allowance available; no tax pool. BARE TRUST: beneficiary directly taxable; no trustee income tax obligation; beneficiary's own personal allowance applies in full.