Tax Changes 2026
1) Making Tax Digital Becomes Reality
If your combined gross income from self-employment and property is more than £50,000 a year, you'll need to comply with Making Tax Digital for Income Tax from April 2026. This represents a fundamental shift from the traditional annual Self Assessment return to quarterly digital reporting.
Under the new system, you'll need to maintain digital records and submit income and expenses updates to HMRC using approved software throughout the year. A year later, in April 2027, the threshold drops to £30,000, and in April 2028, it lowers again to £20,000.
HMRC has confirmed it won't apply late submission penalties during the first year (2026-27). The new penalty regime will commence from April 2027, giving you time to adapt.
2) Dividend Tax Rates Increase
Company directors and shareholders face higher dividend tax bills from April 2026. Income tax rates on dividend income will rise to 10.75% from 8.75% for those paying the basic rate of tax, and to 35.75% from 33.75% for those on the higher rate. The additional rate remains at 39.35%.
This affects the popular strategy of paying yourself a low salary and higher dividends. While dividends remain more tax-efficient than salary, the gap is narrowing.
3) Inheritance Tax: Business and Farm Relief Capped
The government has announced that the level of the Agricultural and Business Property Reliefs threshold will be increased from £1m to £2.5m when it is introduced in April 2026. Previously, these reliefs offered unlimited 100% inheritance tax exemption on qualifying business assets.
This allows spouses or civil partners to pass on up to £5m in qualifying agricultural or business assets between them before paying inheritance tax, on top of existing allowances. Assets above the threshold will qualify for 50% relief, resulting in an effective 20% tax rate.
If you've made lifetime gifts of qualifying business property since 30 October 2024, these will count against your allowance if you die within seven years of the gift.
4) Working From Home Tax Relief Scrapped
Employees who are required to work from home are currently able to claim tax relief at a flat rate of £6 per week. That's changing from 6 April 2026. The government is removing the ability to claim this relief directly from HMRC.
From April 2026, the only tax-free option will be employer reimbursement of actual evidenced costs. If you've never claimed but were required to work from home in recent years, you can still claim for the current and up to four previous tax years before this closes.
5) Electric Vehicle Tax Changes
From April 2026, electric cars will no longer benefit from a zero-rate exemption from Vehicle Excise Duty. Most electric vehicles will pay the standard rate of approximately £200 per year. However, for electric vehicles, the Expensive Car Supplement threshold increases to £50,000 from April 2026, meaning EVs priced between £40,000 and £50,000 will avoid the additional annual charge.
The Employer National Insurance rate remains at 15%, with the Secondary Threshold frozen at £5,000 and the Employment Allowance at £10,500 for eligible businesses.
FAQs:
1. When does Making Tax Digital for Income Tax start
MTD for Income Tax begins in April 2026 for those with gross income over £50,000 from self-employment and property combined. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028.
2. Will I still need to file a Self Assessment return under MTD?
You'll need to submit quarterly updates throughout the year, but you'll still submit a final declaration by 31 January, which serves a similar purpose to the current Self Assessment return.
3. How much will dividend tax increase by?
Dividend tax rates increase by 2 percentage points from April 2026: the ordinary rate rises from 8.75% to 10.75%, and the upper rate from 33.75% to 35.75%.
Conclusion:
The 2026/27 tax year introduces some of the most significant changes to UK taxation in recent years. The shift to Making Tax Digital alone will transform how thousands of sole traders and landlords manage their tax affairs, whilst dividend and inheritance tax reforms will require many business owners to rethink their financial planning. The key is preparation. Those who start adapting now – whether that means trialling MTD-compatible software, reviewing their remuneration strategy or seeking professional advice on estate planning – will find the transition far less disruptive.
