INCOME TAX
Dividend tax rates increased by 2 percentage points
From 6 April 2026, with the dividend ordinary rate increased from 8.75% to 10.75%, and the dividend upper rate from 33.75% to 35.75%. The additional dividend rate remains 39.35% and the dividend allowance remains £500. (s.8 ITA 2007, Finance Act 2026, s.4)
Owner-managed companies considering dividends versus salary/bonus extraction should take note.
Property income tax rates increased by 2 percentage points
From 6 April 2027, separate rates of Income Tax will apply to property income which is defined in s.17A ITA 2007. The rates are 22% basic, 42% higher and 47% additional.
Savings income rates increased by 2 percentage points
From 6 April 2027 the rates applying to savings income increase to 22%, 42% and 47% for basic, higher and additional-rate taxpayers. (Finance Act 2026, s.5)
Reordering of allowances
Following the introduction of ‘property income’ (s.17A ITA 2007), the stacking order of the components of total income now broadly comprises:
- Non-savings income other than property income
- Property income
- Savings income, and
- Dividend income.
From 6 April 2027, the personal allowance should first be allocated to non-savings income (s.25(2) and 25(3A) ITA 2007), which will continue to be taxed at the current lower rates. Any crumbs left over can be set against property income, savings income and dividend income.
Effective 06 April 2025:
Non-dom regime abolished and FIG regime introduced.
- Temporary Repatriation Facility available where remittance basis of taxation was claimed previously.
- Overseas Workday Relief substantially reformed.
These changes were covered in a previous blog post which can be accessed here.
Post departure profits
Temporary non-residence rules (TNR – para 110 et seq. Schedule 45, FA 2013) apply to individuals leaving the country who resume UK tax residence within five years of departure. Previously, if these rules were engaged, dividends representing extraction of post-departure trade profits from close companies (or foreign equivalents) were exempt from the retrospective tax charge. In other words if dividends were extracted out of profits made after leaving the UK such profits would be post-departure profits.
Effective 6 April 2026, this specific exception has been removed; consequently, if an individual is caught by the TNR legislation, any such dividend extraction will be subject to UK income tax upon their return (s.401C, s.408A, and s.413A ITTOIA 2005).
Approved mileage rate now 55p
Effective 6 April 2026 the approved mileage rate for cars and vans stands increased from 45p to 55p per business mile for the first 10,000 miles, with 25p thereafter. (s.230 ITEPA 2003). Corresponding changes apply to Mileage Allowance Relief (s.231 ITEPA) and the self-employed simplified mileage basis (s.94F et seq. ITTOIA 2005).
Homeworking tax deduction abolished
Effective 6 April 2026, employees can no longer claim an income tax deduction for unreimbursed additional household expenses incurred while working from home. This change eliminates both the actual-cost claim and the standard £6-per-week flat-rate claim previously accessible under s.336. The restriction is enforced by the newly minted s.360B ITEPA 2003. However, employer-paid homeworking allowances or direct reimbursements of actual additional expenses remain fully exempt from tax and National Insurance under s.316A ITEPA 2003.
Mandatory payrolling of benefits in kind postponed and phased
From April 2027, mandatory payrolling, and real-time reporting, of benefits will cover company cars, car fuel, vans, van fuel and employer-provided medical benefits; most other benefits will follow from 06 April 2028. Benefits arising on account of cheap loans and accommodation remain outside mandatory payrolling for the time being. (s.684(2)(1ZA) ITEPA 2003 and Schedule A1 of PAYE Regs 2003.
Carried interest now taxed as trading income
Effective 6 April 2026 the taxation of carried interest has been fundamentally reformed. Carried interest is brought into a statutory trading-income regime, rather than relying on the former special CGT treatment. This is a major change for private-equity, asset-management and investment professionals (s.23I ITTOIA 2005).
CAPITAL GAINS TAX
BADR tax rate increased to 18%
Where Business Asset Disposal Relief (BADR) applies to gains the capital gains tax rate changed to 14% from 6 April 2025, then to 18% from April 2026 (s.169N TCGA 1992) and (s.8, FA 2025). The lifetime limit for the relief remains £1 million.
Investors’ relief
The lifetime limit for investors’ relief has been reduced from £10m to £1m for disposals made on or after 30 October 2024 (s.169VK and 169VL TCGA 1992, s.10 FA 2025).
Where investors’ relief applies to gains the capital gains tax rate is 14% from 6 April 2025, then 18% from April 2026 (s.169VC TCGA 1992) and (s.9, FA 2025).
EOT CGT relief reduced to 50%
Effective 26 November 2025, the CGT relief on a qualifying disposal of shares to an Employee Ownership Trust was reduced from 100% of the gain to 50%. The remaining 50% is effectively held over and can come into charge on a subsequent disposal by the EOT trustees. (s.236H TCGA 1992 and s.35(4) FA 2026)
Finance Act 2025 introduced a number of additional conditions for EOT CGT relief, including requirements concerning UK residence of trustees, trustee independence, consideration paid, and post-sale disqualifying events. The disqualifying-event period was also extended (s.31 and Schedule 6 FA 2025).
Share for share exchanges: anti-avoidance rule modernised
For transactions taking place on or after 26 November 2025, the anti-avoidance rules governing share exchanges and company reorganisations were modernised. The new rules focus on whether securing a tax advantage is one of the main purposes of the arrangements rather than relying on the older formulation (s.36 to s.38, FA 2026) and (s.135 et seq. TCGA 1992).
The new provisions include transitional and anti-forestalling rules designed to stop a reconstruction being used to manufacture an earlier disposal or preserve an old CGT/BADR/Investors’ Relief rate. Basically, a share-for-share exchange following a rate change will no longer be analysed solely by reference to the normal reconstruction rules.
Incorporation relief to be claimed
From 6 April 2026 incorporation relief is no longer automatic. A taxpayer must claim the relief by the first anniversary of the 31 January following the relevant tax year and provide specified information to HMRC. The former s.162A election to disapply the relief is no longer relevant to transfers made on or after 6 April 2026 (s.162 TCGA 1992)
LLP liquidation anti-avoidance
A new rule applies from 30 October 2024 where an LLP member contributes an asset to an LLP and after the LLP ceases to be tax-transparent (e.g. in liquidation), the LLP disposes of the asset back to that member or a connected person. The member is treated as having disposed of and reacquired the asset immediately before contribution at market value, preventing the intended CGT avoidance (s.59AA TCGA 1992) which was possible before.
Gift hold-over relief
When an individual gifts shares in a trading company, gift hold-over relief is restricted if the company holds non-trading investments, such as rental properties or excess cash. The restriction relies on a ratio of the company’s ‘chargeable business assets’ to its total ‘chargeable assets’.
The original hold-over relief rules predated 2002, when the Intangible Fixed Assets (IFA) regime and Substantial Shareholding Exemption (SSE) rules were introduced. Because post-2002 IFAs are not chargeable assets for TCGA purposes, and because SSE exempts gains on the disposal of a subsidiary, these assets were excluded from the hold-over fraction working altogether. This created a legislative anomaly that unfairly inflated the tax restriction for trading companies.
New rules effective for disposals on or after 6 April 2027 resolve this distortion. These assets are now deemed to be chargeable assets solely for the purpose of the hold-over restriction calculation, ensuring the ratio accurately reflects the company’s true balance of trading versus non-trading assets (Schedule 7, TCGA 1992).
INHERITANCE TAX
Business Property Relief (BPR) and Agricultural Property Relief (APR) restricted
Effective 6 April 2026 the amount of qualifying business property eligible for 100% relief from Inheritance Tax is subject to a single, combined £2.5 million allowance per individual. This unified cap applies jointly across both Business Property Relief (BPR) and Agricultural Property Relief (APR).
Any qualifying asset value exceeding this allowance will generally receive a reduced relief rate of 50%, resulting in an effective Inheritance Tax rate of 20% on the excess. Where an estate contains a mix of both business and agricultural assets that together exceed the threshold, the £2.5 million allowance is allocated between them proportionately based on their values (s.124D IHTA 1984).
BPR – AIM and other qualifying shares
Effective 6 April 2026 the previous 100% relief treatment available for certain qualifying business shares traded on markets such as AIM is now restricted so that only 50% relief is available, subject to the new statutory framework (s.105 IHTA 1984).
Pension funds within IHT charge
Effective on or after 6 April 2027 most unused pension funds and pension lump-sum death benefits will lose their historic inheritance tax exemptions and be brought within the scope of Inheritance Tax (IHT) (s.150A IHTA 1984).
Share transfers to EBTs
Effective 30 October 2024, the inheritance tax exemption for Employee Benefit Trusts has been tightened in that shares now transferred into a trust must generally have been beneficially owned by the transferor for at least two years prior to the transfer (s.28 and s.75 IHTA 1984).
CLOSE COMPANIES – CORPORATION TAX
Loan to participator tax charge
The s.455 CTA 2010 tax charge on loans and advances by close companies to participators increased from 33.75% to 35.75% effective from 6 April 2026 because s.455 CTA 2010 links the rate to the dividend upper rate in ITA 2007 s.8(2).
Close-company “bed and breakfasting” rules
This change is effective 30 October 2024. Whilst the traditional 30-day and £15,000 matching rules continue to govern normal business repayments, the loophole allowing individuals to undo aggressive avoidance arrangements has been permanently shut. Under the updated framework, if an extraction scheme triggers a tax charge under the s.464A Targeted Anti-Avoidance Rule (TAAR), the company is locked out from ever claiming a refund; subsequent “return payments” will no longer reverse the tax bill, turning a temporary compliance hurdle into a permanent tax penalty. (s.464B CTA 2010 repealed and s.464A remains relevant).
Capital allowances — new 40% first-year allowance
Effective for qualifying expenditure incurred on or after 1 January 2026, the UK capital allowances framework has been substantially amended. A new 40% First-Year Allowance (FYA) has been introduced for qualifying main-pool plant and machinery expenditure (s.45U CAA 2001. The standard writing-down allowance (WDA) rate for remaining main-pool expenditure is reduced from 18% to 14% (s.56(1) CAA 2001).
This new 40% FYA operates alongside existing capital incentives for companies and unincorporated structures alike. It must be structurally prioritised behind Full Expensing (s.45A CAA 2001) for corporate entities and the Annual Investment Allowance (s.51A CAA 2001), which both continue to provide an immediate 100% first-year deduction up to their respective statutory limits.
Furnished Holiday Lettings (FHL) regime abolished
Effective 6 April 2025 for Income Tax and CGT 01 April 2025 for corporation tax the FHL regime was abolished. The former special treatment for capital allowances, CGT reliefs and pension-relevant earnings ceased.
VALUE ADDED TAX
Private school education within VAT
Effective 1 January 2025 private school education and boarding became subject to 20%VAT following removal of the relevant education exemption. Anti-forestalling provisions apply to certain payments made before commencement (Group 6, Schedule 9, VATA 1994).
NATIONAL INSURANCE
Effective 06 April 2025 the main rate of secondary Class 1 NICs (as well as Class 1A and Class 1B rates) has been increased from 13.8% to 15% (s.9 SSCBA 1992). Concurrently, the statutory secondary threshold, the earnings level at which an employer becomes liable to pay secondary Class 1 contributions, has been reduced from £9,100 to £5,000 per annum (Reg 11(3A) SSCR 2001). This reduced threshold is legislated to remain frozen until 5 April 2028, after which it will be indexed annually to the Consumer Price Index (CPI)
The Employment Allowance increased from £5,000 to £10,500 (s.1 NICA 2014), and the previous £100,000 employer-NIC eligibility restriction was removed (s.2 NICA 2014).
From 6 April 2026 the framework allowing UK expatriates to make voluntary National Insurance contributions from overseas has been heavily restricted. Going forward, UK nationals living abroad who want to protect their UK state pension can no longer use the cheap Class 2 rate and must pay the more expensive Class 3 rate instead. To qualify to make these voluntary payments, overseas applicants must now prove a much deeper connection to the UK by showing either 10 continuous years of UK residency or 10 full years of paid UK National Insurance contributions before they left (Regs 148A & 148B SSCR 2001).
TAX ADMINISTRATION
Additional information now required from close-company directors
MTD for Income Tax now mandatory for sole traders and landlords with qualifying income over £50,000.
MTD taxpayers are subject to a points-based late-submission regime rather than simply the traditional self assessment penalty structure for every missed submission (Schedule 24, FA 2021).
The tax administration framework has been progressively amended to move taxpayers towards mandatory electronic filing and communications. From 1 April 2026, HMRC’s old online filing service for Corporation Tax returns and accounts closed for new filings; commercial software is required now (Reg 3(2A) SI 2009/3218, Schedule 18, FA 1998).
