Major changes to the UK tax system will kick in from April 2026
There will be changes in a couple of weeks(Image: Peter Dazeley via Getty Images)
For most people, the beginning of a new tax year signals holiday entitlements being refreshed and marks the final opportunity to maximise ISA contributions for the year. However, for some, broader changes to the tax system taking effect could prove particularly challenging.
This includes a workplace allowance that many employees can claim from HMRC being scrapped from April. We consulted Rowan Harding DipFPS, a financial planner at Path Financial, regarding which changes are being implemented and who they’re most likely to impact.
The dividends tax rate
“A lot of the changes that are coming in really are more to do with business owners and businesses as an entity,” notes Harding. “So for somebody who does have some earned income, because they run their own business, the dividend (payments made by companies to shareholders) rate is going to increase by 2% from April.
“The basic rate will go up to 10.75%; the higher rate will go up to 35.75%. The dividend allowance remains the same at £500, which has decreased in previous tax years. So we’ll see what happens on that front.”
She warns the “implications are definitely going to be felt by smaller business owners, sadly”, who arguably already shoulder substantial tax burdens. “They may not be able to afford, necessarily, to run their businesses with an increased cost,” says Harding. “There may be more smaller businesses that go under. Hopefully we still have this wonderful entrepreneurship that happens in the UK.”
National Minimum Wage increase
This is welcome news for those earning the national minimum wage. The National Minimum Wage will rise from £7.55 to £8 an hour for apprentices and under 18s, it will leap from £10 to £10.81 for 18-20-year-olds, and for those aged 21 and over, it will increase from £12.21 to £12.71. “It’s really important that you do get that increase, because ultimately, even with that increase, that amount of money for most people is a really hard amount of money to live off,” Harding admits.
For business owners, particularly those running small businesses with employees, this could be “probably one of the biggest costs”, and it will also affect National Insurance contributions.
Business Property Relief and Agricultural Property Relief
The Government plans to cap reliefs, meaning anyone with business or agricultural assets exceeding £2.5m will face an effective inheritance tax rate of 20%. For those impacted, Harding suggests it might be “worth reviewing wills or structuring assets to take that into account”.
“Most people would think, ‘If you’ve got £2.5m in agricultural or business property, then you’re probably doing pretty well for yourself’. So it’s perhaps going to be a very small portion of people impacted by this, but you will get people who are in the farming industry being very uncomfortable and upset,” Harding elaborates.
Although the changes are “aimed at those people who have a higher level of assets, the problem is, a lot of assets around agriculture are land-related, and you need land to farm”.
Business Asset Disposal Relief (BADR)
“There is still going to be a million pound cap, but [the Government] is going to raise the Capital Gains Tax for qualifying proposals to 18% (up from 14%) for exiting a business,” Harding explains. “It’s going to be quite a chunky amount of tax when you’re talking large sums of money.”
She continues: “It’s really people who have high levels of assets [who’ll be affected], the general population is not likely to have £1m in terms of business assets.
“The link in with that, is to do with the inheritance tax on Qualifying Alternative Investment Market Shares.” The existing 100% relief “is going to decrease by 50%, so it’ll be a permanent 20% inheritance tax liability, and they’re often used as vehicles to help mitigate inheritance tax for individuals who have a high amount of assets.”
Working from home allowance
This is being scrapped entirely. At present, you can “claim (tax relief on) £6 for costs associated with working from home,” weekly, which may not seem substantial, “but over a year that can add up” Harding notes.
Making Tax Digital
The rollout of Making Tax Digital means “more life admin for people and a bit less for HMRC”, says Harding wryly. Essentially, it’s a new framework for sole traders and landlords earning £50k qualifying gross income profits to declare their income tax, “reducing in April 2027 to £30k”. For those who qualify, submissions will need to be made digitally every quarter. Verify whether you need to register at Gov.uk.
