A significant overhaul of the income tax system is on the horizon, with a new income tax law set to roll out from April 2026, impacting taxpayers across the board. This marks a major shift, replacing the Income Tax Act of 1961, which has been amended repeatedly over the past six decades. The Central Board of Direct Taxes (CBDT) has already commenced internal preparations for the implementation of the new Income Tax Act, 2025.

Aims of the New Legislation

The primary objective of the new Act is not to fundamentally alter the taxation principles but to present the law in a more transparent and coherent manner. The existing income tax law has become cumbersome due to the accumulation of new provisions without the removal of outdated ones, leading to complexities in interpretation and administration. The rewrite intends to streamline the law, reduce ambiguities, and minimize disputes arising from differing interpretations.

Key Changes and Impacts

Several changes are coming that will impact taxpayers. Here’s a breakdown:

• Standard Deduction: The standard deduction is set to increase for all filing statuses. For the 2026 tax year, the standard deduction rises to $32,200 for married couples filing jointly. Single taxpayers and married individuals filing separately will see a deduction of $16,100, and heads of household will receive $24,150.
• Tax Brackets: The IRS has adjusted the federal income tax brackets for the 2026 tax year to account for inflation. The highest tax rate remains at 37% for single taxpayers with incomes exceeding $640,600 ($768,700 for married couples filing jointly). Other rates are also adjusted.
• Retirement Savings: Contribution limits for popular retirement accounts will increase in 2026. The limit for 401(k), 403(b), and government 457 plans will rise to $24,500. The catch-up contribution for those ages 50 and over has been raised to $8,000 for 401(k)s. The IRA contribution limit will also increase to $7,500 in the new year, with those ages 50 and over able to contribute an additional $1,100 in catch-up contributions.
• One Big Beautiful Bill Act (OBBBA): Many of the changes are a result of the One Big Beautiful Bill (OBBB), which was signed into law on July 4, 2025. This bill makes many of the 2017 changes from the Tax Cut and Jobs Act (TCJA) permanent.
• New Deduction for Older Taxpayers: If you're 65 or older at the end of 2025, you may qualify for a new federal income tax deduction of up to $6,000 if you file an individual return, or up to $12,000 if your spouse is also 65 or older and you file jointly. Not everyone 65 or older will receive the full deduction, as the amount you can deduct depends on your modified adjusted gross income (MAGI).
• Income tax and national insurance thresholds frozen: While the headline rates of income tax and national insurance (NI) aren't going up in 2026, the thresholds will remain frozen.

Impact on Investors

Several reforms landing in April 2026 will reduce the tax incentives for investing in smaller companies. Dividend taxes will increase, with the basic rate rising to 10.75%, and the higher rate increasing to 35.75%. As part of the sweeping reforms to inheritance tax (IHT) announced at the Autumn Budget 2024, from 6 April 2026, eligible shares owned for two years in the alternative investment market (AIM) will only attract 50% relief from IHT instead of 100%.

Preparing for the Transition

Taxpayers should familiarize themselves with the new law and consult with tax professionals to understand how these changes will affect their individual tax liabilities and financial planning. The CBDT is also expected to conduct training programs for officers to ensure consistent application of the new law.