Author: Helen Whitehouse

Practical steps to get ready for the new reporting rules.

 

Making Tax Digital for income tax (MTD IT) starts from 6 April 2026 for sole traders and landlords with qualifying income over £50,000. For many businesses and property owners, the change is less about extra tax and more about changing how records are kept and how income is reported to HMRC through the year. HMRC says those in scope will need to keep digital records, send quarterly updates through compatible software, and then complete a year-end process through that software. HMRC has also confirmed that this rollout will widen in later phases, to qualifying income over £30,000 from 6 April 2027 and over £20,000 from 6 April 2028.

 

The main risk is leaving preparation too late. Businesses that already keep clean digital records and reconcile income regularly are likely to find the transition manageable. Those still relying on paper files, spreadsheets with manual rekeying or a year-end tidy-up may find April 2026 more disruptive than expected. This guide sets out who needs to act now, what the new process looks like, and the practical checks worth making before the start date.

Check first whether you are in scope

The April 2026 start date does not apply to everyone in self assessment. It applies first to sole traders and landlords whose total qualifying income from self-employment and property was more than £50,000 in the 2024 to 2025 tax year. HMRC’s eligibility guidance says the test is based on qualifying income from those sources, not total income from all sources. That means salaries, dividends and savings income do not count towards the threshold for deciding whether April 2026 applies, although those figures may still be relevant later in the tax return process.

 

Qualifying income can include:

• income from self-employment
• income from UK property
• income from foreign property
• income from more than one business or property source combined.

HMRC also says income from ceased self-employment or property sources can still count towards qualifying income for the threshold test if it appears on the relevant tax return. That is worth checking where a business has changed, split or ceased activity during the year.

Be clear on who is not starting in April 2026

A lot of unnecessary concern has come from people assuming MTD IT will apply to every taxpayer from April 2026. It will not.

 

As things stand:

• sole traders and landlords with qualifying income over £50,000 start from 6 April 2026
• those over £30,000 start from 6 April 2027
• the government has set out plans for those over £20,000 to start from 6 April 2028
• limited companies are not within this April 2026 MTD IT rollout
• partnerships are not part of the first phase starting in April 2026.

That makes this a narrower change than some headlines suggest, but it is still significant for many landlords, sole traders and owner-managed businesses operating outside a company. Thresholds are for gross income, not net.

Understand what the new process actually involves

MTD IT is not just a digital version of the current self assessment return. HMRC says the process has three main parts.

You will need to:

• create, store and correct digital records of self-employment and property income and expenses
• send quarterly updates to HMRC using compatible software
• submit a year-end tax return process, including any other income and gains, and pay tax due by 31 January following the end of the tax year.

HMRC has described the quarterly submissions as light-touch quarterly updates rather than extra tax returns. That wording matters, because the update is a summary of digital records for the period, not a full tax calculation each quarter.

Get familiar with the quarterly deadlines

For many clients, the biggest change in habit will be the reporting rhythm. HMRC’s current guidance says the quarterly update deadlines are:

• 7 August
• 7 November
• 7 February
• 7 May.

That means businesses in scope from 6 April 2026 will move away from a single annual reporting mindset for business and property income. The work will need to be spread through the year, even though the tax payment timetable remains separate.

 

This is one reason April 2026 preparation matters. The businesses that struggle are likely to be those still treating bookkeeping as a once-a-year job.

Know what records must be kept digitally

HMRC’s digital record guidance is fairly direct. Businesses within MTD IT must create and store digital records of self-employment and property income and expenses. For each item of income or expense, the record needs to include:

• the amount
• the date
• the category of income or expense.

HMRC says MTD IT uses the same categories of income and expenses as self assessment. For self-employment, that includes items such as sales, takings, fees, stock costs, travel, office costs and financial costs. For property, it includes rent and property expenses such as repairs, maintenance and services.

 

In practice, the key point is that a rough spreadsheet total or a box of invoices handed over after the year end is no longer the standard MTD is built around. The system expects business and property records to be digital and kept up to date.

Check whether your software is ready

Compatible software is central to the new regime. HMRC says those in scope will need software that works with MTD IT to keep records, send quarterly updates and complete the year-end submission. There are both full bookkeeping products and bridging-style options on HMRC’s recognised software list, depending on how a business prefers to work.

 

Before April 2026, review whether your current set-up can handle:

• digital record-keeping for all business and property income streams
• quarterly updates to HMRC
• year-end submission through the same or linked software
• inclusion of other sources of income and gains at the end of the tax year, where relevant.

A business may not need the most expensive system on the market, but it does need one that matches how the records are kept in real life.

Review how many income streams need tracking

One of the more practical issues is that many people affected by MTD do not have just one tidy source of income. A taxpayer may have:

• one or more self-employments
• UK rental income
• foreign property income
• ceased sources still relevant to the threshold test
• other personal income that still needs to be included at the year-end stage.

That means the bookkeeping question is not only “Do I have software?” but also “Does my set-up properly separate and capture each source?”

 

This matters because weak source separation creates avoidable problems later, especially where one person has both trading and property income.

Do not assume the old annual tidy-up will still work

Under the old habit pattern, many sole traders and landlords could leave bookkeeping in poor shape for months and still pull together a tax return before 31 January. MTD IT is designed to change that.

 

A sensible shift now is to move towards:

• monthly bookkeeping
• monthly or quarterly reconciliations
• clearer digital storage of invoices and expense evidence
• regular review of business and property categories
• fewer year-end adjustments caused by incomplete records.

This is not only about compliance. More regular records usually make it easier to track profit, cashflow and tax exposure through the year.

Understand the first-year penalty position properly

One of the most useful current easements is that HMRC says it will not apply penalty points for late quarterly updates in the first mandatory year, 2026 to 2027, for those required to join from April 2026. However, that does not mean there is no consequence to poor compliance.

 

HMRC also says:

• digital records still need to be kept
• quarterly updates still need to be sent before the tax return can be completed
• penalties can still apply for late tax returns
• penalties and interest can still apply if tax is paid late.

So the easement is helpful, but it is not a reason to delay preparation. It mainly gives affected taxpayers and agents more room to settle into the quarterly cycle without immediate late-update penalty points.

Check whether an exemption may apply

Not everyone who would otherwise fall within the thresholds has to use MTD IT. HMRC’s exemption guidance says some people are automatically exempt, including:

• those with qualifying income of £20,000 or less
• those without a national insurance number
• trustees and personal representatives, in relation to those roles
• certain Lloyd’s members
• some people who are not physically or mentally capable of using the system, depending on the conditions met.

HMRC also says people may be exempt if they are digitally excluded, meaning it is not reasonable for them to use compatible software to keep records or submit them. Agents can apply on behalf of clients in that position. HMRC has said those clients should still be prepared for MTD while an exemption application is being considered, in case it is refused.

 

That makes exemption an issue to review early rather than close to the deadline.

Prepare for the year-end step, not just the quarterly updates

Quarterly updates are only part of the process. HMRC says that before the final year-end submission is completed, the software will need to include other sources of income and gains where relevant. The final declaration deadline remains 31 January after the end of the tax year. HMRC’s developer guidance states that the final declaration can be made from 6 April after the year end, with a deadline of 31 January the following year.

 

This matters because MTD IT does not remove the need to bring together the wider tax picture. It changes the route and timing for business and property records, but the end-of-year completion step still matters.

If you are below the threshold, do not ignore this completely

Businesses and landlords below the April 2026 threshold may still want to act early. HMRC allows voluntary sign-up in some cases, and the wider rollout means many taxpayers who are not affected in 2026 may still be affected in 2027 or 2028. HMRC’s current sign-up guidance says someone who will be required from a later date can choose to sign up voluntarily now for the current tax year, provided they are eligible and use compatible software.

 

For some, the best use of 2025 to 2026 is not early enrolment but process improvement, so it is a good time to:

• clean up records
• move to compatible software
• separate business and personal transactions properly
• improve source document storage
• get used to quarterly bookkeeping reviews.

A practical April 2026 checklist

Use this checklist to see what needs doing now.

Confirm whether April 2026 applies

• Check your 2024 to 2025 qualifying income from self-employment and property.
• If the total is over £50,000, assume April 2026 is live unless an exemption applies.

List all relevant income sources

• Separate each self-employment.
• Separate UK and foreign property income where relevant.
• Identify any ceased sources that still affect the threshold calculation.

Review digital records

• Can you record income and expenses digitally by amount, date and category?
• Are records up to date enough to support quarterly updates?

Check software

• Confirm whether your current software is compatible with MTD IT.
• If not, decide whether to move to bookkeeping software or a bridging option.

Set a quarterly timetable

• Build internal deadlines ahead of 7 August, 7 November, 7 February and 7 May.
• Do not rely on the first-year easement as a substitute for a process.

Review exemptions early

• Check digital exclusion or automatic exemption grounds where relevant.
• If applying, do it early and keep preparing in parallel.

Prepare for the year-end stage too

• Make sure the year-end process will still capture other income and gains, not just business and property summaries.

How we can help

The businesses most likely to handle MTD well are the ones that treat it as a records and process project, not just a filing deadline. The quickest wins usually come from confirming whether the threshold applies, cleaning up income sources, choosing the right software and setting a workable quarterly routine.

 

We can help you:

• confirm whether April 2026 applies based on your qualifying income
• review whether your records meet HMRC’s digital requirements
• choose or assess software for quarterly reporting
• separate self-employment and property records properly
• prepare an internal timetable for quarterly updates and the year-end submission
• review whether an exemption may apply.

 

Looking forward

MTD IT is now close enough that affected businesses should treat it as a live change, not a future one. HMRC is already urging those in scope to act, and the move to quarterly digital reporting will be much easier where the groundwork is done before 6 April 2026. HMRC said on 5 February 2026 that 864,000 sole traders and landlords face the new rules from April 2026, which gives a sense of how many taxpayers are now in the countdown phase.

 

The practical message is simple: confirm whether you are in scope, get the records into good shape, check the software, and build a reporting routine before the first quarterly deadline arrives.

 

Need help with MTD? We can assist.

 

Practical steps to keep pension planning on track.

 

Pensions remain one of the most tax-efficient ways to save for the long term. They can help reduce taxable income, support business owners’ extraction planning, and build retirement wealth in a structured way. Problems usually arise when contributions are made without first checking the rules. That is when an otherwise sensible pension contribution can trigger an unexpected tax charge.

 

The good news is that most surprise tax bills come from a relatively short list of issues. The main ones are the annual allowance, the tapered annual allowance for higher earners, the money purchase annual allowance after flexibly accessing benefits, and missed carry-forward checks. For the 2025/26 tax year, the standard pension annual allowance is £60,000, but it can be as low as £10,000 in some cases.

 

This guide sets out the main allowance checks to make, where tax charges tend to arise, and how to build a simple review process before contributions are paid.

Start with the standard annual allowance

For most people, the first check is the standard annual allowance. For the 2025/26 tax year:

• the standard annual allowance is £60,000
• it applies across all of your pensions combined, not to each pension separately
• going above it can trigger an annual allowance tax charge if you do not have enough carry forward available.

 

That sounds straightforward, but the key point is that the test is not based solely on the cash you personally paid in. Depending on the type of pension, the relevant figure may include:

• personal contributions
• employer contributions
• contributions made by someone else on your behalf
• pension growth measured under defined benefit rules, not just cash paid into a pot.

 

This is one reason people can be caught out. They assume they are safely below the limit because their own monthly contributions look modest, but the real pension input amount for tax purposes is higher.

Remember that tax relief and annual allowance are not the same thing

A common misunderstanding is treating the annual allowance as the same as the amount you can personally contribute and still receive tax relief. They are linked, but they are not identical.

 

In broad terms:

• the annual allowance is the pension saving limit before an annual allowance tax charge may arise
• tax relief on personal contributions is usually limited to 100% of your relevant UK earnings in the tax year
• employer contributions work differently and are not limited by your personal earnings in the same way, although other tax rules still need to be considered.

 

This matters for directors and business owners in particular. Someone with a low salary may assume they cannot build pension funding efficiently, but employer contributions may still be a valid route. The reverse also applies: someone can stay within their earnings-based personal tax relief limit and still face an annual allowance issue if total pension input is too high.

Check whether the tapered annual allowance applies

Higher earners need to take a second look, because the standard £60,000 annual allowance does not apply in every case.

 

HMRC says the annual allowance is reduced for some high-income individuals. Under the current rules, tapering starts to matter where:

• threshold income is over £200,000
• adjusted income is over £260,000.

 

Where the taper applies:

• the annual allowance is reduced by £1 for every £2 of adjusted income above £260,000
• the minimum tapered annual allowance is £10,000.

 

This is one of the main sources of surprise tax bills because it often affects people whose income varies. Bonuses, dividends, partnership profits and employer pension contributions can all alter the position. A contribution that looked fine based on last year’s income can become more problematic if profits or total remuneration rise sharply.

Watch for the money purchase annual allowance

Another major trap is the money purchase annual allowance, often shortened to MPAA.

 

For the current tax year, the MPAA is £10,000. It can apply if you have flexibly accessed money from a defined contribution pension. Once triggered, it reduces the annual allowance for money purchase pension contributions and can limit future pension funding more sharply than many people expect.

 

In practice, this catches people who:

• took taxable income from a pension
• thought the access was a one-off event with no future impact
• later wanted to restart or increase contributions
• assumed the standard £60,000 allowance still applied.

 

If you have taken money from a pension, do not assume future contributions can be planned in the normal way. Check whether the MPAA has been triggered before making further contributions.

Do not overlook carry forward

Carry forward is often the difference between an efficient contribution and a tax charge.

 

HMRC says unused annual allowance from the previous three tax years can potentially be carried forward to the current tax year, subject to the rules. The individual must have been a member of a registered pension scheme in those earlier years.

 

Carry forward can be useful where:

• profits rise sharply in one year
• a business wants to make a larger employer contribution
• retirement planning has been delayed and needs catching up
• earlier allowances were not fully used
• a large bonus is being paid.

 

But carry forward is also an area where people make assumptions too quickly. Check the following.

• Were you a member of a registered pension scheme in each year you want to carry forward from?
• What was your actual annual allowance in those years?
• Did tapering apply in any of them?
• Has the MPAA affected the position?
• What pension input was already used?

 

Carry forward is powerful, but only when the numbers have been checked properly.

Know where surprise tax bills usually come from

Unexpected pension tax charges rarely come from the pension itself. They usually come from weak planning around it. The most common causes are:

• assuming the annual allowance is always £60,000
• missing that tapering applies for higher earners
• forgetting that the MPAA was triggered
• ignoring employer contributions when adding up total pension input
• failing to review defined benefit accrual properly
• relying on carry forward without calculating unused allowance accurately
• making year-end contributions in a rush without checking income first.

 

Most of these are avoidable with a short annual review.

Be especially careful if income changes year to year

People with steady salaries often find pension allowance planning easier than those with variable income. Extra care is usually needed if you are:

• a company director taking salary and dividends
• a business owner making employer contributions
• a partner with changing profit allocations
• someone receiving bonuses or irregular earnings
• approaching retirement and adjusting contribution levels
• taking ad hoc pension withdrawals while still contributing elsewhere.

 

These situations do not make pension planning unsuitable. They simply mean the allowance checks need to be done in the actual tax year, not based on assumptions.

Keep a simple contribution review process

The safest approach is to review pension funding before the end of the tax year, not after a contribution has already gone in. A sensible review should cover:

• total expected pension input for the current tax year
• whether the standard annual allowance applies in full
• whether threshold income and adjusted income bring tapering into play
• whether the MPAA has been triggered
• how much unused carry forward is available
• whether personal contributions are within earnings limits for tax relief
• whether employer contributions would be more efficient in your case.

 

This review does not need to be complicated, but it does need to happen before a large contribution is paid.

Keep an eye on other pension tax limits too

The annual allowance is the main issue for avoiding surprise tax bills from contributions, but it is not the only pension tax measure worth knowing about.

 

HMRC’s current pension scheme rates show that for 2025/26:

• the standard individual lump sum allowance is £268,275
• the standard individual lump sum and death benefit allowance is £1,073,100.

 

These are less likely to create an immediate contribution surprise for most people than the annual allowance rules, but they still matter for wider retirement planning and benefit access.

 

 

A practical checklist before making pension contributions

Use this checklist before increasing pension funding.

Confirm the basic limit

• Start with the standard annual allowance of £60,000 for 2025/26.

Add up all pension input

• Include personal contributions.
• Include employer contributions.
• Include all pension arrangements, not just one scheme.

Check whether tapering applies

• Review threshold income.
• Review adjusted income.
• Do not assume higher income automatically means tapering, but do not ignore the test either.

Check whether the MPAA applies

• Have you flexibly accessed a defined contribution pension?
• If yes, confirm whether the £10,000 MPAA is now the working limit.

Review carry forward

• Check the previous three tax years.
• Confirm unused allowance rather than estimating it.
• Make sure you were a member of a registered pension scheme in those years.

Check personal tax relief scope

• Make sure personal contributions fit within relevant UK earnings if you are relying on personal tax relief.

Avoid rushed year-end decisions

• Large late-March contributions often create the most avoidable errors.
• Review the numbers while there is still time to adjust.

Frequently asked questions

What is the pension annual allowance for 2025/26?

The standard annual allowance is £60,000 for the 2025/26 tax year. It covers total pension saving across all your pensions, not each pension separately.

 

What is the minimum tapered annual allowance?

The tapered annual allowance can reduce the annual allowance down to £10,000 for some high-income individuals.

 

What is the money purchase annual allowance?

The MPAA is £10,000 for the current tax year and can apply after flexibly accessing money from a defined contribution pension.

 

Can unused pension allowance be carried forward?

Potentially, yes. HMRC says unused annual allowance from the previous three tax years can be carried forward to the current tax year, subject to the rules.

 

Why do people get caught out?

Usually because they assume the standard annual allowance applies without checking tapering, MPAA, total pension input or carry forward properly.

 

 

How we can help

Pension planning works best when contribution decisions are checked before money goes into the scheme. The fastest wins usually come from confirming the real annual allowance position, checking for taper or MPAA issues, and making sure carry forward has been calculated properly.

 

We can help you:

• review how much pension input has already been used this tax year
• check whether tapering may reduce the standard annual allowance
• confirm whether the MPAA has been triggered
• assess carry forward from earlier years
• compare personal and employer contribution routes
• help structure pension funding without creating an avoidable tax charge.

Looking ahead

Pensions still offer strong tax advantages, but the rules are not always as simple as the headline allowance suggests. For many people, the best way to avoid surprise tax bills is not to contribute less, but to check more carefully before contributing.

 

A short review each tax year is usually enough to spot the main risks. If income is changing, retirement plans are shifting, or pension withdrawals have already started, that review becomes even more important.

 

Speak to us for further pension planning advice.

Businesses could receive financial incentives to hire young people under new Government proposals to tackle youth unemployment and expand apprenticeship opportunities.

Ministers have announced plans to create around 200,000 jobs through a £1bn funding package aimed at supporting employers and helping young people move into work. As part of the initiative, companies will receive a £3,000 grant for each person aged 18 to 24 they employ who has been out of work and actively seeking a job for at least six months.

Small and medium-sized businesses will also be offered £2,000 for every new apprentice they recruit. The Government estimates that around 60,000 young people could benefit directly from these measures.

The proposals also include expanding the existing jobs guarantee scheme. Currently, young people aged 18 to 21 who have been claiming Universal Credit and searching for work for 18 months are guaranteed a six-month job placement. Under the new plans, eligibility for this support would be extended to people up to the age of 24.

Prime Minister Sir Keir Starmer said the reforms form part of a wider effort to build “an economy that works for everyone”, while helping to close the skills gap and support more young people into long-term employment.

The announcement sits alongside wider employment reforms proposed in the Government’s Employment Rights legislation. The act is intended to strengthen worker protections, including reducing the qualifying period for unfair dismissal claims from two years to six months. Labour had originally pledged to introduce this protection from the first day of employment during the election campaign.

Talk to us about your business.

Chancellor Rachel Reeves has announced a £50m support package for low-income and vulnerable households reliant on heating oil, as prices continue to surge following the conflict in the Middle East.

Kerosene, the fuel used in heating oil systems, has risen sharply in recent weeks, outpacing increases in petrol and mains gas. Unlike gas and electricity, heating oil is not covered by the energy price cap. This leaves off-grid households exposed to sudden price spikes, often requiring large upfront payments to refill tanks.

The Government will distribute the funding through local councils from 1 April, using the new Crisis and Resilience Fund (CRF). The allocation reflects regional demand, with £27m for England, £17m for Northern Ireland, £4.6m for Scotland and £3.8m for Wales. Northern Ireland is particularly affected, with up to 60% of homes relying on heating oil.

Ministers have acknowledged that many vulnerable households face significant financial pressure due to the need to pay lump sums to maintain heating and hot water.

Alongside the financial support, the Government has launched a wider review of the heating-oil market. Plans include introducing sector-wide regulation for the first time, improving consumer protections and working with suppliers to enhance service standards.

The Competition and Markets Authority is also investigating the market to identify any excessive pricing. Further proposals include appointing a formal regulator, potentially Ofgem, and establishing an ombudsman under the forthcoming Energy Independence Bill.

Talk to us about your finances.

Mortgage costs have increased sharply in recent weeks, with new data showing that a typical borrower is now paying around £788 more per year compared with before the recent escalation in tensions involving Iran.

The figures, compiled by Moneyfacts, are based on a £250,000 mortgage over 25 years with an average two-year fixed rate, which has risen to 5.28%.

This increase reflects a rapid shift in the mortgage market since late February. Lenders have responded to heightened economic uncertainty by raising rates and withdrawing some of their most competitive products. In particular, sub-4% fixed-rate deals, which were widely available only weeks ago, have largely disappeared.

Major lenders, including Barclays, HSBC, NatWest, Nationwide and Santander, have all withdrawn these lower-rate options.

Average rates have climbed quickly. Two-year fixed deals have risen from 4.83% at the start of March to 5.28%, while five-year fixes have increased from 4.95% to 5.32%. For borrowers considering a five-year deal, this equates to an additional £651 per year compared with just a fortnight ago.

At the same time, the choices have narrowed. There are now 689 fewer mortgage products available than earlier in the month, reducing options for buyers and those remortgaging.

Despite this, the situation remains less severe than the market disruption following the September 2022 UK mini-Budget, when around a quarter of mortgage deals were withdrawn.

Borrowers on fixed rates are protected until their current deal ends. However, those approaching renewal should plan early, particularly as rates may continue to fluctuate in line with the Bank of England’s decisions.

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Pay growth in the UK has slowed to its weakest level in more than five years, according to the latest figures from the Office for National Statistics.

Average earnings, excluding bonuses, rose by 3.8% in the three months to January, down from 4.2% in the previous period. While this marks a continued cooling in wage growth, earnings are still increasing faster than inflation, which stood at 3% in January.

The labour market remains relatively steady. The unemployment rate held at 5.2%, close to a five-year high, while the number of people on payrolls increased by around 20,000 in February, bringing the total to 30.3m.

Public-sector pay continues to outpace the private sector. Annual average earnings growth reached 5.9% in the public sector, compared with 3.3% in the private sector over the same period.

Job vacancies showed little movement overall. Early estimates indicate a slight decline of 6,000 roles, leaving 721,000 vacancies in the three months to February.

These figures come ahead of the Bank of England’s latest interest rate decision. While there had been expectations of a rate cut, this now appears unlikely. Rising fuel and energy costs, linked to escalating tensions in the Middle East, have increased the risk of inflation picking up again.

As a result, policymakers are expected to hold borrowing costs steady, balancing slowing wage growth against ongoing inflation pressures.

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The Government has announced a further change to planned inheritance tax reforms affecting agricultural property relief (APR) and business property relief (BPR).

 

From 6 April 2026, a new allowance will cap how much qualifying agricultural and business property can receive 100% relief. The allowance will be £2.5 million per estate, up from the previously proposed £1m.

 

Individuals will have an allowance that refreshes every seven years, and trusts will have an allowance that refreshes every 10 years. Where the combined value of qualifying business and agricultural assets exceeds the allowance, the excess is expected to qualify for relief at 50%, rather than 100%.

 

The allowance is expected to be available to both individuals and trusts, and transferable between spouses and civil partners. This means couples may be able to apply up to £5m of 100% APR and BPR between them, in addition to other inheritance tax allowances such as the nil rate band.

 

The change will be introduced through an amendment to the Finance Bill 2025/26, which the Government said it expects to bring forward in January 2026. The Government also stated that the higher threshold would reduce the number of APR-claiming estates affected in 2026/27 from 375 to 185.

 

The policy has been revised several times since its initial announcement at the Autumn Budget 2024. Anyone with significant farming or business assets, including those using trusts, may wish to review succession and estate planning ahead of April 2026.

 

Talk to us about your taxes.

Paying yourself this year.

 

Paying yourself from your business sounds simple until you start weighing up salary, dividends and pensions, and how each one affects your take-home pay. The “best” answer also shifts depending on profits, cashflow and what else is going on at home, for example, child benefit, student loans or whether you are close to the higher-rate tax threshold.

 

This guide breaks down the main options for the 2025/26 tax year and explains the key thresholds that tend to shape decisions. It is designed as a practical reference you can come back to when you are planning the year ahead, topping up income, or thinking about longer-term savings. Where it helps, we flag the points that usually need a quick check before you act.

 

The 2025/26 numbers that drive most decisions

These are the figures that typically matter when deciding how to extract income.

Income tax bands and personal allowance for England, Wales and Northern Ireland in 2025/26

• Personal allowance: £12,570
• Basic rate: 20% on taxable income up to £50,270
• Higher rate: 40% on taxable income from £50,271 to £125,140
• Additional rate: 45% over £125,140

The personal allowance reduces by £1 for every £2 of income above £100,000.

 

If you pay Scottish income tax (on non-savings, non-dividend income), the bands and rates differ. HMRC publishes Scottish PAYE rates for 2025/26.

 

National insurance (NI)

NI often makes salary decisions more sensitive than people expect.

 

Employees (Class 1 primary) in 2025/26 (category A, most common):

• 0% up to the primary threshold
• 8% on the main band
• 2% above the upper earnings limit.

 

Employers (Class 1 secondary) in 2025/26 (category A):

• 15% once earnings exceed the secondary threshold.

 

Key thresholds include:

• Primary threshold (employee NI starts): £12,570 per year
• Secondary threshold (employer NI starts): £5,000 per year
• Lower earnings limit (protects benefit entitlement even when no NI is due): £6,500 per year.

 

Dividends, allowance and tax rates

Dividends do not attract NI, but they do come with their own tax rules.

• Dividend allowance: £500 (taxed at 0%, it does not extend your tax bands)
• Dividend tax rates (2025/26):
  • 75% (basic rate band)
  • 75% (higher rate band)
  • 35% (additional rate band).

 

A useful reminder from HMRC’s published material: over 90% of UK taxpayers do not receive taxable dividend income, which is one reason dividend reporting rules catch people out when they start investing or running their own company.

Corporation tax reminder (because dividends come from post-tax profits)

If you run a limited company, dividends are paid from profits after corporation tax.

 

For company profits (nonring-fenced) the main published rates are:

• 19% small profits rate for profits under £50,000
• 25% main rate for profits over £250,000
• profits between £50,000 and £250,000 pay the main rate reduced by marginal relief.

 

This matters because “dividends are lower taxed than salary” is not always true once you include corporation tax;

 

What salary gives you and what it costs

Salary can still play a useful role even where dividends are available.

• It uses your personal allowance predictably.
• It creates “earned income”, which can matter for certain reliefs and for personal pension contribution limits.
• It helps build entitlement for state benefits, depending on levels and credits, and the lower earnings limit is the key figure for many people.
• It is a deductible business cost for corporation tax when paid wholly and exclusively for the trade (normal remuneration rules apply).

Employer NI now starts at £5,000

The employer NI threshold for 2025/26 is £5,000 per year, and the employer rate (category A) is 15%.

 

That means a salary set close to the personal allowance may create an employer NI cost unless another relief offsets it.

 

 

Employment allowance can offset employer NI

Employment allowance can reduce an eligible employer’s annual Class 1 NI bill by up to £10,500, but not everyone qualifies.

 

Two common points to be aware of are:

• a company with only one director must not have that director as the only employee liable for employer (secondary) NI if it wants to claim
• connected companies can only claim once across the group.

 

For some single-director companies, employer NI becomes a significant cost of running a salary strategy.

For directors and NI, timing can matter

Directors are subject to specific NI calculation rules (an annual earnings period), which means payroll timing can affect deductions. This is one area where it is worth modelling rather than relying on rules of thumb.

 

How dividends work and the practical limits

Dividends can be a tax-efficient tool, but only when you follow the underlying company law and tax rules.

Dividends are only available when the company has distributable reserves

A limited company can only pay dividends from distributable profits (after accounting for accumulated losses). If reserves are tight, salary or pension contributions may be the only practical routes.

Dividends are not deductible for corporation tax

Salary reduces taxable profits. Dividends do not. That is why dividend planning should always include a corporation tax view, not just your personal tax position.

 

 

Dividend allowance and reporting

In 2025/26, the dividend allowance is £500, and dividend tax rates depend on your income tax band.

 

Dividends also feed into other calculations that are based on total taxable income, for example adjusted net income (see child benefit, below).

 

Pensions are often the most tax efficient “pay yourself later” option

For many owner managers, pensions sit alongside salary and dividends, rather than competing with them.

Pension contributions can reduce tax in more than one place

Depending on how you fund them, pension contributions can:

• reduce personal income tax (personal contributions, subject to limits and relief method)
• reduce corporation tax (employer contributions, subject to normal deductibility rules)
• avoid NI when made as an employer contribution, which is often a key advantage versus extra salary.

Annual allowance in 2025/26

The annual allowance is £60,000 in 2025/26. High earners can face the tapered annual allowance. HMRC’s published thresholds for 2025/26 include:

• threshold income limit of £200,000
• adjusted income limit of £260,000
• minimum tapered annual allowance of £10,000.

 

If you have already flexibly accessed pension benefits, the money purchase annual allowance is £10,000 for 2025/26.

 

 

Personal contributions depend on relevant earnings, but dividends usually do not count

Tax relief on personal pension contributions is generally limited to 100% of relevant UK earnings.

 

If most of your income comes from dividends, that can restrict how much you can contribute personally with tax relief. Employer contributions from your company can often solve that issue, subject to the annual allowance and the company’s position.

For non-earners and low earners, small contributions still get relief

If you earn less than £3,600 a year, you can still get tax relief on contributions up to £2,880 net (grossed up to £3,600).

Pension participation remains high

The latest government figures show that around 89% of eligible employees in Great Britain saved into a workplace pension in 2024 (21.7m people). Overall participation across all employees was around 82% (23.3m people).

 

For business owners, the message is simple: pensions remain a mainstream, tax-advantaged way to build long-term assets.

 

Common approaches by business type

Limited company owner-managers

Most extraction plans blend the three routes.

1. A base salary, often set with NI thresholds and benefit entitlement in mind.
2. Dividends as the flexible top-up, assuming reserves allow.
3. Employer pension contributions where cashflow supports longer-term saving.

What changes the answer quickly is:

• whether the company can claim employment allowance
• whether your total income approaches £50,270 (upper earnings limit for NI and higher rate tax -entry point)
• whether your total income approaches £100,000, where the personal allowance starts tapering.

 

Why employer NI now matters

If a company pays a director a salary of £12,570 in 2025/26, then:

• employee NI is generally nil at that level (it starts above £12,570)
• employer NI may apply above £5,000 at 15% unless reliefs are available.

 

If the company cannot claim employment allowance, that employer NI cost can reduce or remove the historical advantage of “salary up to the personal allowance”. If the company can claim employment allowance, the cost may be fully offset.

 

This is exactly where a tailored comparison helps, because corporation tax, profits and cash extraction needs all interact.

Sole traders and partnerships

When you do not have dividends, you draw profits. In practice, “pay yourself” planning often focuses on:

• understanding profit levels early enough to avoid surprises in payments on account
• using pension contributions to reduce taxable income where appropriate.
• watching the same thresholds (higher rate entry, personal allowance taper, child benefit charge).

If incorporation is on the table, you should run a full comparison. The decision includes legal responsibilities, profit volatility and admin costs, not just tax.

 

Household issues that can change the “best” answer

The high-income child benefit charge and dividends

The high-income child benefit charge (HICBC) applies when adjusted net income exceeds £60,000 (for tax years starting from 2024/25 onwards).

 

Adjusted net income includes dividends. The House of Commons Library explains that child benefit is fully withdrawn by £80,000 under the current taper design.

 

This means dividend planning can have a direct impact on whether your household keeps child benefit.

Student loan repayments

If you are self employed or complete self assessment for another reason, income can be assessed across the year. HMRC works out student loan repayments from your self assessment return, and repayments are based on your income for the whole year.

 

A practical example from the Low Incomes Tax Reform Group shows plan thresholds for 2025/26, including Plan 1 (£26,065) and Plan 2 (£28,470), and how self assessment can apply when income is spread across sources.

 

For company directors taking dividends, this is worth checking carefully. Payroll deductions may not be the full story if you also complete self assessment.

 

What has been announced for after 5 April 2026

This guide uses 2025/26 figures, but “pay yourself in 2026” often means decisions that fall into the next tax year. HMRC has published measures that would increase dividend tax rates from 6 April 2026, including raising the ordinary and upper dividend rates.

 

If you expect to pay dividends around the tax year end, it may be worth scheduling a short review before 5 April 2026 to confirm timing, reserves and the most current rules.

 

Practical checklist for the rest of 2025/26

If you want to take action before 5 April 2026, these steps usually provide the most value.

1. Forecast your total personal income for the tax year, including salary, dividends, benefits, interest, rental income and any other taxable income.
2. Identify which thresholds you are near, especially £50,270, £60,000, £100,000 and £125,140.
3. Confirm whether your company can claim employment allowance, and if not, quantify employer NI when setting salary levels.
4. Check distributable reserves before declaring dividends, and document dividend decisions properly.
5. Review pension scope, including annual allowance position, taper risk and whether employer contributions make more sense than personal ones.
6. If child benefit applies, model adjusted net income and consider whether pension contributions could reduce exposure to the charge.
7. If you are in self assessment, include student loan considerations in the forecast, especially if income is split between payroll and other sources.

 

Before the end of the tax year, it is worth taking a step back and checking how your actual numbers compare with what you planned, especially if profits have moved, you have taken irregular dividends or your household income has changed. A simple forecast for the remainder of 2025/26 can show whether you are about to cross a key threshold, whether a pension contribution could reduce tax, or whether a different mix of salary and dividends would leave you better off while still protecting cashflow.

 

If you would like a sense check, we can run a few scenarios using your year-to-date figures and what you expect to draw between now and 5 April 2026, then set out clear next steps.

 

Discuss the intricacies of paying yourself with our experts.

 

According to the latest British Chambers of Commerce Quarterly Economic Survey, UK business confidence has weakened further.

More firms are expecting to raise prices and scale back investment amid persistent economic pressures.

Less than half of responding businesses, 46%, expect their turnover to increase over the next 12 months. This marks the lowest level of confidence recorded in three years and underlines the continued fragility of the recovery for many firms.

Cost pressures remain acute. Over half of businesses, 52%, plan to increase prices in the next three months, a sharp increase from 44% in the previous quarter. At the same time, more than a quarter of firms, 27%, report cutting back their investment plans, while only 19% have increased investment. Pullbacks are most pronounced in the hospitality, retail, and manufacturing sectors, where more than a third of businesses are reducing their planned spending.

The survey, which gathered responses from more than 4,600 businesses across the UK, primarily SMEs, was conducted between mid-November and early December, spanning the period before and after the Autumn Budget.

Taxation remains the leading concern for businesses, cited by 63% of respondents, an increase on the previous quarter and matching levels seen after last year’s Budget. Worries were particularly high ahead of the Chancellor’s statement, easing slightly afterwards. Inflation also continues to weigh heavily, troubling more than half of firms.

Despite recent interest rate cuts, businesses report little evidence of renewed momentum. With further cost pressures expected and forecasts pointing to rising unemployment, many firms are entering the year ahead with caution rather than confidence.

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Zombie firms face collapse amid economic pressure. The UK could see unemployment rise sharply in 2026.

Struggling “zombie” companies are beginning to fail under sustained cost pressures, according to new analysis from the Resolution Foundation.

In its new year outlook, the think tank warns that many businesses are facing a “triple whammy” of prolonged high interest rates, elevated energy costs, and successive increases to the minimum wage. For firms that have already been underperforming, these pressures may prove decisive.

The report suggests that 2026 could mark a turning point for the UK economy, following decades of weak productivity growth. Productivity, measured as output per hour worked, is crucial to enhancing wages and improving living standards. However, the Foundation cautions that any improvement may come at the cost of short-term disruption, including higher unemployment as less productive firms exit the market.

UK unemployment is already at its highest level outside the Covid period for a decade. The headline rate reached 5.1% in October, as many employers delayed hiring decisions ahead of Rachel Reeves’s Autumn Budget.

Business groups say higher taxes and rising wage costs are discouraging recruitment. Economists have long argued that so-called zombie firms have held back the economy by tying up labour and capital that could be used more productively elsewhere. Persistently low interest rates after the 2008 financial crisis allowed many heavily indebted businesses to survive despite weak performance.

Although the Bank of England has cut base rates six times since August 2023, operating costs remain well above pre-pandemic levels following 14 consecutive rate rises.

Separate research from the British Chambers of Commerce highlights the strain. Business confidence fell to a three-year low at the end of 2025, with tax and inflation cited as the most significant concerns. Fewer than half of firms expect turnover to rise in the year ahead, while investment plans continue to be scaled back.

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