For the past few months, there have been many suggestions about what will be in this year’s budget. A sneak peek was even available online for a short while before the budget was announced.
Last year’s budget had employers paying the brunt of the tax increases while this year most of the tax increases will take effect more quickly on landlords, savers and those who receive dividends. The tax rates for most dividends are due to increase by 2% from April 2026 with rates for savings and property also increasing by 2% from April 2027.
The increase in dividends deliberately targets those who run their own companies and receive dividends as a form of remuneration.
Taxes on property income are devolved and under the control of the Scottish Government for taxpayers based in Scotland, so this change does not apply to them yet. However, it has been announced that the Scottish Government is being given powers to increase tax on property income separately and this may be something we see when the Scottish Budget is released on 15 January 2026.
Along with these increases, the freeze on personal tax thresholds (fiscal drag), which began in April 2022, has been extended a further three years to 2031 increasing significantly, the number of people brought into tax as well the number of higher rate taxpayers in the future.
Those who save into pension schemes through salary sacrifice arrangements are the other major losers, although most other aspects of the pension tax regime thankfully remained untouched.
However, for some people there was good news in the budget as the two-child cap on Child Benefit is being removed and locally, plans are being developed to regenerate Kirkcaldy High Street. The Enterprise Management Incentive (EMI) scheme is being expanded, and the amounts companies can raise through EIS and VCT investments is being increased.
Our article with our initial thoughts on the budget can be found https://msactax.co.uk/news/oh-to-have-a-crystal-ball-wait-a-minute and as you can see much like the OBR, we got a little ahead of ourselves wishing clients a Happy Thanksgiving a day early!
Personal Tax
Tax bands and rates
For once, this is an area where there was little or no change. Details of the allowances, tax rates and thresholds and the limits for pensions and savings etc. can be found here: LINK
Tax on property income
Property income is any income from the letting of land and buildings.
Individuals have a Property Allowance. This exempts property income (before expenses) of £1,000 or less per annum. Property income over £1,000 can be offset either by the £1,000 Property Allowance or by deducting relevant expenses.
As if there hasn’t been enough kicks at landlords in recent years yesterday delivered another one as the government is introducing the following separate tax rates for property income from 2027/28:
22% for basic rate taxpayers
42% for higher rate taxpayers
47% for additional rate taxpayers.
Tax on savings income
Savings income is income such as bank and building society interest.
The Savings Allowance applies to savings income and the available allowance in a tax year depends on the individual’s marginal rate of Income Tax. Broadly, individuals taxed at up to the basic rate of tax have an allowance of £1,000. For higher rate taxpayers the allowance is £500. No allowance is due to additional rate taxpayers.
Savings income within the allowance still counts towards an individual’s basic or higher rate band and so may affect the rate of tax paid on savings above the Savings Allowance.
Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. This will remain at £5,000 until 5 April 2031. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income, less allocated allowances and reliefs) exceeds £5,000.
The current tax rates on savings income will be maintained for 2026/27. From 6 April 2027, there will be a 2% increase in the applicable tax rates. The basic rate will increase to 22%, the higher rate will increase to 42%, and the additional rate will increase to 47%.
Tax on dividends
Currently, the first £500 of dividends is chargeable to tax at 0% (the Dividend Allowance). This £500 is retained for 2026/27 and these rules apply to the whole of the UK.
From 6 April 2026, there will be a 2% increase in the ordinary and upper rates of Income Tax applicable to dividends. The additional rate will remain unchanged at 39.35%
Dividends received above the Dividend Allowance will be taxed at the following rates for 2026/27:
10.75% for basic rate taxpayers
35.75% for higher rate taxpayers
39.35% for additional rate taxpayers.
Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.
To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.
For many of our clients who run their own companies and are remunerated through dividends they will see an increase in their tax payments. Once again, they seem to be excluded from the definition of ‘working people’.
Income Tax ordering rules
The Income Tax ordering rules will change from 6 April 2027. This means that the personal allowance will be deducted from employment, trading or pension income first. Currently, individuals can choose which income the allowance is offset against but where relevant this will mean increased tax liabilities for affected individuals.
Pension tax limits
For 2026/27 no change so the following will apply
The Annual Allowance (AA) is £60,000.
Individuals who have ‘threshold income’ for a tax year of greater than £200,000 have their AA for that tax year restricted. It is reduced by £1 for every £2 of ‘adjusted income’ over £260,000, to a minimum AA of £10,000.
The Lump Sum Allowance, which relates to the general maximum that may be able to be taken as a tax-free lump sum, is £268,275.
The Lump Sum and Death Benefit Allowance, which relates to the general maximum that may be able to be taken as a tax-free lump sum in certain circumstances, is £1,073,100.
After all the rumours of potentially scrapping or at least restricting tax relief on contributions and the tax-free allowance, it is welcome that nothing so drastic has been introduced. Hopefully, rather than having the annual scaremongering on this topic, it can be put to rest for at least a few years.
Individual Savings Accounts
For 2026/27, the limits are as follows:
Individual Savings Accounts (ISAs) £20,000
Junior ISAs £9,000
Lifetime ISAs £4,000 (excluding government bonus)
Child Trust Funds £9,000.
These limits will remain frozen until 5 April 2031.
From 6 April 2027, the annual ISA cash limit will be set at £12,000. The remaining £8,000 will be designated for stocks and shares ISA investment. This restriction will not apply for those over the age of 65, where the cash ISA limit will remain at £20,000.
National Living Wage and National Minimum Wage
The government has announced increased rates of the National Living Wage (NLW) and National Minimum Wage (NMW) which will come into force from 1 April 2026. The rates which will apply are as follows:
|
|
NLW |
18-20 |
16-17 |
Apprentices |
|
From 1 April 2026 |
£12.71 |
£10.85 |
£8.00 |
£8.00 |
The apprenticeship rate applies to apprentices under 19 or 19 and over in the first year of apprenticeship. The NLW applies to those aged 21 and over.
Taxable benefits for company cars
The rates of tax for company cars are amended for 2026/27:
the charge for zero emission cars rises from 3% to 4%
the charge for other cars with emissions below 75g/km increases by 1%
the maximum benefit of 37% remains.
The government has confirmed increases to the benefit in kind rates for company cars for tax years up to and including 2029/30.
The government announced that it is introducing a temporary easement to mitigate the increasing benefit in kind tax liabilities of plug-in hybrid electric vehicle (PHEV) company cars due to new emission standards. The easement will apply retrospectively from 1 January 2025 to 5 April 2028. Transitional arrangements will apply to certain PHEVs until 5 April 2031.
Car fuel benefit charge
The government will increase the car fuel benefit charge from 6 April 2026.
Company vans
The government will increase the Van Benefit Charge and the Van Fuel Benefit Charges from 6 April 2026.
Mandating the reporting of benefits in kind via payroll software
Confirming a recent announcement, the use of payroll software to report and pay tax on benefits in kind will become mandatory, in phases, from April 2027. This will apply to income tax and Class 1A NICs. Initially it had been planned to be implemented from 6 April next year.
Changes to salary sacrifice for pensions from April 2029
One of the rumours that did in fact come to fruition is that the government is changing how salary sacrifice for pension contributions works.
Salary sacrifice is when you agree to reduce your gross salary or sacrifice a bonus and, in return, your employer pays the same amount into your pension which saves both employee and employer’s national insurance.
From April 2029, only the first £2,000 per annum of employee pension contributions through salary sacrifice will be exempt from NICs. Contributions through salary sacrifice, like all pension contributions, will still be exempt from Income Tax (subject to the usual limits set out above).
Employers and employees can still make contributions above £2,000 through salary sacrifice arrangements. However, employee contributions above this amount will be subject to employer and employee NICs like other employee workplace pension contributions.
Employers will need to report the total amount sacrificed through their existing payroll. All employer pension contributions outwith salary sacrifice arrangements will continue to be free of NICs.
Employees, as well as employers, will pay NICs on the amount above £2,000 for employee contributions through salary sacrifice.
Employees who choose to salary sacrifice to receive Tax Free Childcare or Child Benefit can keep doing so.
Expanding workplace benefits relief
This measure will introduce new legislative exemptions for the reimbursement of eye tests, flu vaccines and home working equipment.
Under current law, the exemption only applies where the employer provides the benefit directly. This change will ensure that reimbursements are treated in the same way.
This will have effect on or after 6 April 2026.
Removal of tax relief on non-reimbursed homeworking expenses
From 6 April 2026, this measure will remove the tax relief available to employees who have incurred additional household costs if they are required to work from home. These costs include increased household utility costs and business telephone calls. For clients who run their own limited companies from home this will mean that the annual reduction of £312 for the company and top of of the same amount to their directors' current account is lost.
It will only apply to those employees who have not had these costs reimbursed by their employer.
This will not impact the existing ability for employers that reimburse employees for costs relating to homeworking where eligible without deducting Income Tax and NICs.
Business
Corporation Tax
The government has confirmed that the rates of Corporation Tax will remain unchanged, which means that, from April 2026, the rate will stay at 25% for companies with profits over £250,000. The 19% small profits rate will be payable by companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective Corporation Tax rate.
There was a commitment made to capping the main rate of Corporation Tax at 25% for the duration of this Parliament.
The penalty for taxpayers submitting a Corporation Tax return late will double for returns for which the filing date is on or after 1 April 2026.
Capital allowances
The Full Expensing rules for companies allow a 100% write-off on qualifying expenditure on most plant and machinery (excluding cars) as long as it is new and unused. Similar rules apply to integral features and long-life assets at a rate of 50%.
The government will reduce the main rate Writing Down Allowance (WDA) from 18% to 14% per year from 1 April 2026 for Corporation Tax purposes and 6 April 2026 for Income Tax purposes. For businesses with chargeable periods which span 1 April (Corporation Tax) or 6 April (Income Tax), a hybrid rate will apply. The WDA on the special rate pool remains at 6% per year.
For expenditure incurred on or after 1 January 2026, the government will introduce a new first year allowance (FYA) of 40% for all businesses on main rate assets, including most expenditure on assets for leasing. Cars, second-hand assets and assets for leasing overseas will not be eligible.
The Annual Investment Allowance is available to both incorporated and unincorporated businesses. It gives a 100% write-off on certain types of plant and machinery up to certain financial limits per 12-month period. The limit remains at £1 million.
The 100% FYA for qualifying expenditure on zero-emission cars and the 100% FYA for qualifying expenditure on plant or machinery for electric vehicle chargepoints have been extended to 31 March 2027 for Corporation Tax purposes and 5 April 2027 for Income Tax purposes.
Targeted Research and Development Advance Assurance Service
The government will pilot a targeted advance assurance service from spring 2026. This will enable small and medium-sized enterprises to gain clarity on key aspects of their Research and Development (R&D) tax relief claims before submission to HMRC. A summary of responses to the advance clearance consultation will also be published.
This is a welcome introduction as HMRC are currently proving a significant barrier to legitimate claims made with lengthy enquiries into the eligibility of claims.
Enterprise Investment Scheme and Venture Capital Trusts investment limit increase and restructure
The government has announced significant changes to the limits applying to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) from 6 April 2026. The gross assets requirement that a company must not exceed for EIS and VCTs will increase from £15 million to £30 million immediately before the issue of the shares, and from £16 million to £35 million immediately after the issue. The annual investment limit that companies can raise will increase from £5 million to £10 million. For Knowledge-Intensive Companies (KICs), the annual investment limit will increase from £10 million to £20 million. The company’s lifetime investment limit will increase to £24 million and for KICs to £40 million. The Income Tax relief that can be claimed by an individual investing in VCTs will decrease from 30% to 20%.
Expanding the eligibility limits of the Enterprise Management Incentives scheme
The government is also increasing certain limits relating to the Enterprise Management Incentives (EMI) scheme. For EMI contracts granted on or after 6 April 2026, the employee limit will increase from 250 employees to 500 employees, the gross assets test will be increased from £30 million to £120 million, and the company share option limit will be increased from £3 million to £6 million. The limit on the exercise period will increase to 15 years and will also apply retrospectively to existing EMI contracts which have not already expired or been exercised.
Capital Taxes
Capital Gains Tax
Capital Gains Tax rates
The Capital Gains Tax rates remain unchanged for 2026/27.
Capital Gains Tax annual exemption
The annual exempt amount will remain at £3,000 for 2026/27.
Employee Ownership Trusts
The current relief available for qualifying disposals by business owners selling their shares to Employee Ownership Trusts (EOTs) is a 100% exemption of any gain which has provided a significant saving for business owners passing the running of the company to its employees. This has seen the populraity of such business transfers flourish.
However, from 26 November 2025 (so an instant change), the relief will only exempt 50% of the gain.
Business Asset Disposal Relief and Investors’ Relief will not be available where the 50% exemption has been claimed. The remaining 50% of the gain on disposal will not form part of the disposer’s chargeable gain. Instead, 50% of the gain will be held over and deducted from the trustees’ acquisition cost. This will mean that it will come into charge on any subsequent disposal or deemed disposal of the shares by the trustees of the EOT.
Incorporation Relief
The government will introduce a requirement for taxpayers to actively claim incorporation relief for transfers of a business to a company on or after 6 April 2026. The relief previously applied automatically.
Business Asset Disposal Relief
The rate applying for individuals claiming Business Asset Disposal Relief and Investors’ Relief will increase to 18% for disposals made on or after 6 April 2026.
Inheritance Tax
Inheritance Tax nil rate bands
The nil rate band has been frozen at £325,000 since 2009 and will continue to be frozen until 5 April 2031. An additional nil rate band, called the ‘residence nil rate band’ is also frozen until 5 April 2031 at the current £175,000 level, as is the residence nil rate band taper starting at £2 million.
Agricultural Property Relief & Business Property Relief
Despite some intense lobbying, from 6 April 2026 there has been very little change to last year’s announcement, agricultural and business property will continue to benefit from the 100% IHT relief up to a limit of £1 million. The limit is a combined limit for both agricultural and business property. Such property in excess of the limit will benefit from a 50% relief.
The £1 million limit applies per person and is refreshed every seven years. The one change made is this allowance will, sensibly and in accordance with reliefs such as the nil rate band, be transferable between married couples or civil partners including where the first death was before 6 April 2026.
There may be a further £1 million allowance for trusts in certain situations but the rules are complex.
The £1 million limits for both individuals and trusts will be frozen until at least 6 April 2031.
Cap for excluded property in trusts
With effect from 6 April 2025, the government has retrospectively put in place a cap of £5 million for excluded property held in trust as at 30 October 2024. This cap applies to settled property which was excluded property situated outside the UK at the time of the relevant charge. The £5 million cap applies to each ten-year cycle.
Other Matters
The VAT registration threshold
From 1 April 2026 the VAT registration threshold remains at £90,000 and the deregistration threshold at £88,000.
Making Tax Digital for Income Tax Self Assessment
The government is committed to delivering Making Tax Digital for Income Tax Self Assessment, which starts in April 2026 for those with qualifying income over £50,000. The government will expand the rollout of the programme to those with incomes over £30,000 in April 2027 and £20,000 in April 2028. However, the government will not proceed with Making Tax Digital for Corporation Tax.
Enforcement and tax collection
The government has announced a variety of compliance initiatives, which include the following:
investing further in HMRC’s debt management work and publishing a new tax debt strategy which outlines plans to deliver year-on-year reductions to the overall tax debt balance as a percentage of tax receipts
requiring Income Tax Self Assessment taxpayers with Pay As You Earn (PAYE) income to pay more of their Self Assessment liabilities in-year via PAYE from April 2029
investing in HMRC to modernise the tax system and help taxpayers get their taxes right first time through greater digitalisation. This investment will improve how HMRC uses information from third parties, and to build new technology to increase the use of data-driven prompts to help taxpayers avoid errors when submitting tax returns
investing £64 million over the next five years in HMRC’s existing partnerships with private sector debt collection agencies to collect more tax debt.
In addition, from April 2029 businesses will be required to issue all VAT invoices as e-invoices, with a roadmap on implementation to be published next year.
High Value Council Tax Surcharge (Mansion Tax - England Only)
The current Council Tax system uses property values from 1991. From April 2028, properties valued at £2 million or more will be liable to a new High Value Council Tax Surcharge (HVCTS).
The HVCTS will be staggered depending on the value of the property. For property over £2 million, the annual charge will be £2,500. For property valued between £2.5 - £3.5 million, the annual charge will be £3,500 and for those properties valued between £3.5 - £5 million, the annual charge will be £5,000. Properties valued in excess of £5 million will have an annual charge of £7,500.
The surcharge will be collected alongside the existing Council Tax due for the property.
Will Scottish and Welsh Governments follow. They usually do so watch this space!
Electric Vehicle Excise Duty (eVED)
The government is introducing eVED, a new mileage charge for electric and plug-in hybrid cars, which will come into effect from April 2028. Drivers will pay for their mileage alongside their existing VED. This will be on an estimated basis so and there is currently no information on how this will be monitored.
The tax paid by EV drivers will be around half the fuel duty rate paid by the average petrol/diesel driver, with a reduced rate for plug-in hybrid drivers. When eVED takes effect in April 2028, an average EV driver will pay around £240 per year or £20 per month.
Other vehicle types, such as vans, buses, motorcycles, coaches and HGVs, will be out of scope of eVED when it is introduced, with the transition to electric power for these vehicle types being currently less advanced than for cars.
