April 2026 – Personal Tax changes

April 2026 – Personal Tax changes

Increase in tax on dividends, directors’ loan interest rate rise, business asset disposal relief hike, frozen thresholds, inheritance tax for farmers and family businesses, Making Tax Digital starts, CIS, and more

Dividend tax

There will be a 2% increase in the rates of income tax paid on dividends at the basic and higher rate of taxation.

The rates of tax on dividends for 2026-27 will increase to 10.75% at the basic rate and 35.75% for the higher rate. The additional rate will remain at 39.35%.

Directors’ loans tax charge

The tax charge on directors’ loans will increase by 2% from 33.75% to 35.75% for loans made on or after 6 April 2026 under section 455 rules. This change will be particularly relevant for owner managed businesses where directors regularly use their loan accounts to manage cash flow.

The main and small profits rates of corporation tax remain unchanged at 25% and 19%.

Business asset disposal relief (BADR)

The old entrepreneur’s relief, now known as business asset disposal relief (BADR), will again be changing with increased BADR rates of 18% from 6 April 2026.

Frozen tax thresholds

The freeze on personal tax thresholds continues, with no respite until 2031, likewise for the inheritance tax cap. This means that the personal allowance remains £12,570, with the higher rate of 40% tax kicking in from £50,271, and then the 45% rate remains on earnings above £125,140.

In Scotland, there are changes due to a 7.4% rise in the basic tax threshold, while the higher, advanced and top rate thresholds for income tax will be frozen. This means that the starter rate of 19% in Scotland, which is lower than the UK, now kicks in from £12,570 – £16,537, and the basic band from £16,538 – £29,526 for the 20% rate.  

Inheritance tax

Inheritance tax (IHT) thresholds continue to be frozen. However, there are major changes for privately owned businesses and farmers with the overhaul of business property relief (BPR) and agricultural property relief (APR) eroding 100% IHT tax relief under pre-April 2026 rules.

Business property relief and agricultural property relief

With effect from 6 April 2026, for privately owned businesses and farmers the allowance for the 100% rate of IHT relief will be set at £2.5m on the (combined) value of property with a 50% rate of relief thereafter. So, over the threshold, IHT will be paid at a reduced rate of 20%, not the current 40% figure.

It is worth bearing in mind that under the new APR/BPR rules the inheritance tax can be paid over a 10-year period, not the usual six-month window for estates, and is at a reduced rate of 50% over the threshold, not the full standard 40% IHT rate.

Making Tax Digital for Income Tax for £50k cohort

The first wave of mandatory quarterly reporting under Making Tax Digital (MTD) for Income Tax starts with registration now required for sole traders, landlords and self-employed earning qualified income of over £50,000 based on tax year 2024-25. The first quarterly reporting deadline is Friday 7 August.

Savings

Personal savings allowance remains at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and £0 for additional rate taxpayers. This is something to watch carefully with higher interest rates, meaning that using tax-free savings products like ISAs is more important than usual. In addition, changes to ISAs from April 2027 will see the cash limit reduced to £12,000 to encourage investment in stocks and shares ISAs.

Umbrella companies, recruitment agencies and PAYE liability

Major change to the rules affecting a wide net of recruitment agencies. This is a tightening of the rules to tackle non-compliance in labour supply chains which include an umbrella company, or any third person introduction of a new ‘joint and several liability’ rule.

This measure is coming in to crack down on situations where umbrella companies contract out workers to other organisations, resulting in a blurring of the responsibilities surrounding off-payroll labour/IR35 rules.

Under the new rules, from 6 April, the umbrella company will retain the primary responsibility for deduction of PAYE and national insurance contributions (NIC) from the pay of their employees supplied to clients. However, if this does not happen, the responsibility to account for PAYE and NIC will shift to the recruitment agency.

Venture capital trusts (VCT)

A number of changes to VCT are coming into effect with the rate of income tax relief reducing from 30% to 20%. This is a significant diminution in the current tax regime.

Enterprise investment schemes (EIS)

Annual limits applicable to EIS companies based in Great Britain (not Northern Ireland) will increase.

Enterprise management incentives (EMI)

Changes to EMI share option schemes also come into force. These schemes allow companies to grant options to employees to buy company shares at a future date at a predetermined price.

EMI schemes will be available to be used by independent quoted or unquoted companies with group gross assets of £120m. Previously the limit was £30m or less.

Construction industry scheme (CIS) tightened up

From 6 April 2026, contractors operating under the CIS will once again be legally required to submit a monthly CIS return, even when no subcontractors have been paid.

Under the CIS scheme any business sub-contracting construction work may need to pay 20-30% of the agreed fees directly to HMRC as advanced payment of the subcontractors’ tax liability. This is to reduce the risk of fraud and non-payment of tax. However, many large construction companies have ‘gross payment status’, meaning they do not suffer these deductions.

But new rules bring CIS in line with VAT, as demonstrated at tax tribunals when Kittel case is cited. If HMRC suspects fraud has occurred related to CIS, it will now be able to immediately cancel the gross payment status of that taxpayer and penalties of 30% of the lost tax will be in force.

State pension 

The ‘new state pension’ rate rises by 4.8% to £241.30 a week, up from £230.25, equivalent to £12,547.60 a year. This brings the state pension perilously close to the tax-free personal allowance of £12,570. The chancellor has told MPs in parliament that from next April pensioners in receipt of only the state pension, with no other income at all, will not have to pay income tax. How this will work in practice is not clear at this stage.

There are currently two state pension systems – the ‘basic state pension’, and the ‘new state pension’, introduced in 2016.    

Child benefits

Child benefit payments are increasing from £26.05 to £27.05 per week, equivalent to £1,406.60 a year for the eldest or only child, and to £17.90 from £17.25 per week – £930.80 a year – for subsequent children. Child benefit is usually paid every four weeks and will automatically be paid into a bank account.