Author: Helen Whitehouse

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.

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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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The UK new car market reached a significant milestone in 2025, with registrations exceeding two million for the first time since the pandemic began.

A total of 2,020,373 new cars were registered, marking the third consecutive year of growth. However, the figure remains well below the 2.3m vehicles sold in 2019.

Electric vehicles (EVs) accounted for 473,340 of those registrations, representing a 23.4% market share. While this was a notable increase from 2024, it still fell short of the Government’s 28% target under the Zero Emission Vehicles (ZEV) Mandate. The mandate requires manufacturers to meet annual EV sales thresholds or face financial penalties.

The Society of Motor Manufacturers and Traders (SMMT) warned that the industry is relying on heavy discounts, often worth several thousand pounds per vehicle, to stimulate demand. It described this approach as unsustainable, arguing that consumer appetite is not keeping pace with regulatory ambitions.

Although the ZEV Mandate includes flexibilities, such as emissions credit trading and fleet-wide emissions reductions, these were further relaxed in April following industry pressure. At the same time, potential fines for non-compliance were reduced.

Government support has included a £2bn Electric Car Grant Scheme, offering up to £3,750 per vehicle, alongside continued investment in charging infrastructure. However, plans announced in the Autumn Budget to introduce a per-mile tax on EVs risk dampening demand.

The Office for Budget Responsibility estimates incentives could add 320,000 EV sales over five years, but the new tax may reduce sales by 440,000 overall. Transport Minister Keir Mather said Government action was driving uptake, with EV sales up nearly 24% year-over-year.

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What directors need to do.

Companies House has started rolling out mandatory identity checks for directors and people with significant control (PSCs). These checks form part of a wider programme of Companies House reform under the Economic Crime and Corporate Transparency Act 2023, designed to improve the reliability of information on the public register and reduce the misuse of UK companies.

This guide explains who needs to verify, how the process works in practice, what you need to do for your own roles and what happens if you miss your due date.

What is changing and why it matters

Historically, Companies House accepted information largely on trust, with limited verification at the point of filing. Recent reforms give Companies House stronger powers to query and reject information, remove false or misleading content, and take a more active role as a gatekeeper of the register.

Companies House reports that, in the last year covered by its 2024 to 2025 annual report, it used new powers to remove suspicious information and combat registered office abuse, impacting over 100,000 companies (including striking off companies where necessary).

Identity verification is one of the centrepieces of this reform programme. The aim is straightforward: to make it harder for people to register companies, become directors or declare control using false identities.

Key dates and the transition period

Identity verification became a legal requirement from 18 November 2025. Companies House describes this as the start of a 12-month transition period, giving companies time to ensure directors and PSCs verify and then connect their verified identity to each role by the relevant due dates.

What this means in practice.

• There is no single one-day deadline for everyone. Your due date depends on your role and your filing cycle.
• Companies House will show due dates on the public register for each role you hold (displayed on the people tab).
• Companies House also states it will email companies directly before the confirmation statement filing deadline to explain what must be done.

If you act for multiple companies (or hold multiple roles), you should assume you will need to manage more than one deadline and process.

Who needs to verify their identity?

Companies House guidance explains that you need to verify if you are any of the following:

• a company director
• the equivalent of a director (including members, general partners and managing officers)
• a director of an overseas company registered in the UK
• a person with significant control (PSC)
• an authorised corporate service provider (ACSP) (a Companies House authorised agent)
• (in due course) other filing roles, as Companies House expands the regime.

Companies House also notes it will introduce identity verification later for people who file at Companies House, limited partnerships, corporate directors, corporate limited liability partnership (LLP) members and officers of corporate PSCs.

The two steps you must complete

A point that often gets missed is that the regime has two separate steps.

Companies House sets these out as the following.

1. Complete an identity verification check successfully and receive a unique identifier called a Companies House personal code.
2. Provide an identity verification statement to Companies House to confirm the identity is verified (this includes supplying your personal code) for each relevant role.

In other words, verifying once is not always the end of the job. You then need to use your personal code to connect your verified identity to each director/PSC role you hold, in the way Companies House requires.

Ways to verify your identity

Companies House allows two routes.

1. Verify online using gov.uk One Login (free)

Companies House states the online route uses gov.uk One Login and is free of charge. Depending on your circumstances, gov.uk One Login may guide you through one of the following methods:

• using an app
• answering online security questions
• entering photo ID details online and then attending a participating Post Office (where directed).

Government communications around the rollout also reference the Post Office option as additional support for people who need help, while keeping the process digital end-to-end.

2. Use an ACSP (may charge a fee)

An ACSP is an AML-supervised organisation or individual (for example, accountants, solicitors, company formation agents) that registers with

Companies House to carry out identity verification on behalf of others. Companies House guidance notes that ACSPs may charge for this service.

If you already use an agent to file for you, the ACSP route can be practical, particularly where the person verifying cannot use the online route or is based overseas.

The Companies House personal code

When you successfully verify, Companies House issues a unique identifier known as your Companies House personal code. It is personal to you, not to a specific company.

Companies House guidance and blogs highlight these points.

• You generally verify only once (unless Companies House instructs otherwise).
• You use the code when you file a confirmation statement, get appointed as a director, or become a PSC.
• Keep the code secure and only share it with people you trust who file on your behalf.
• Where an ACSP verifies you, Companies House explains that an email will be sent containing your personal code and notes it is an 11-character identifier.

What directors must do, step by step

Step 1: Identify which roles you hold

Start by listing:

• each company where you act as a director
• any roles where you act as the equivalent of a director (for example, LLP member)
• whether you are also recorded as a PSC
• any overseas entity director roles (if relevant).

This matters because Companies House expects you to connect your verified identity to each role in the right way and, in some cases, within a specific time window.

Step 2: Complete identity verification (online or via an ACSP)

Online route (gov.uk One Login)
You will need to set up (or use) a gov.uk One Login and follow the prompts to verify. Companies House and government updates describe the process as designed to be quick and accessible, using app, browser or Post Office routes, depending on what you have available.

Government communications provide some useful indicators of what users experienced during testing and early rollout, including:

• an average gov.uk ID checking app completion time of 4 minutes (18 March to 30 June 2025)
• YouGov Business Omnibus findings (sample of 1,007 senior decision-makers) including 60% awareness of the new requirements, 81% support for identity verification, and 73% agreeing directors/PSCs would find it easy to verify.

ACSP route
If an ACSP verifies you, you provide approved identity documents to them, and they complete the check and confirm it to Companies House using the relevant service. Companies House explains that ACSPs must verify to the same standard as the Companies House service, and they may charge for doing so.

Step 3: Record and safeguard your personal code

Once you receive your personal code, treat it as a sensitive credential. Companies House explicitly advises keeping it secure and only sharing it with trusted people who file on your behalf.

Internal controls that work well in most businesses include:

• storing the code in a secure password manager (or an equivalent controlled record)
• limiting access to those who need it for filings
• keeping an audit trail of when you shared it and with whom.

Step 4: Connect your verified identity to each role by the due date

This step is where many directors will spend their time during the transition period.

Directors (and equivalents): Link via the confirmation statement

Companies House guidance states that directors will need to provide their personal code as part of the company’s next confirmation statement. If you are a director of more than one company, you must do this for each one.

Companies House has also said that directors need to verify before filing the next confirmation statement, or the filing will be rejected.

PSCs: Link via the PSC verification details service, within a defined period

Companies House rules for PSCs include a time-limited window to provide the personal code, and the timing depends on your situation. Companies House guidance sets out the key scenarios.

• If you are both a director and a PSC of the same company:
  • you must provide the personal code separately for each role
  • as a director, you provide it in the company’s confirmation statement
  • as a PSC, you provide it using the PSC verification details service within a 14-day period starting the day after the company’s confirmation statement date.

• If you are a PSC but not a director of the same company:
  • you must provide your personal code within the first 14 days of your birth month (Companies House gives an example: if your date of birth is 22 January, the 14-day period begins on 1 January).

• If you became a PSC after 18 November 2025:
  • you can provide your personal code when first added to the register, or within 14 days of being added.

Companies House also notes you can check the dates of your 14-day period on the Companies House register.

New companies and new appointments

Companies House guidance states that when you register a new company, you will be asked to provide the personal code for each director as part of the registration filing.

This makes early verification useful if you plan to incorporate a new company or make new board appointments during 2026.

Overseas companies registered in the UK

If you are an overseas company, Companies House guidance says you must confirm all directors have verified their identity by the anniversary of the UK establishment’s registration.

What happens if you do not comply

Companies House’s published approach to non-compliance is direct on the legal position and the likely enforcement pathway.

Key points include the following.

• It is unlawful for a director to act as a director without completing identity verification; the company may also break the law if a director (or equivalent) is not verified. PSCs who do not verify may also commit an offence.
• Companies House describes enforcement routes that include prosecution, referral to the Insolvency Service and financial penalties.
• Companies House may take enforcement action where people miss their due dates, including issuing “default” letters and escalating where necessary.
• Even where Companies House does not select a case for prosecution, it notes that directors may still commit an offence for continuing to act without verification, and Companies House may refer cases to the Insolvency Service.
• As a practical filing consequence, Companies House has stated it will reject a confirmation statement if directors have not verified by the time the company tries to file.

Extensions for PSCs

Companies House also sets out a limited discretion to extend a PSC’s identity verification due date by up to 14 days, with rules on how extensions work and what happens after repeated extension requests.

If you anticipate missing a PSC window (for example, travel, illness or access issues), treat it as urgent and address it ahead of time rather than waiting for the window to close.

Privacy, security and practical handling

A few practical points from Companies House guidance are worth highlighting.

• Use only the approved verification routes; Companies House states you should not post or email identity documents to it.
• Your verified identity connects to your gov.uk One Login if you use the online route, and One Login uses its own privacy notice for how it stores and uses information.
• Companies House explicitly warns that identity verification makes impersonation harder but not impossible, so you should still protect your personal code and remain alert to suspicious activity.

Separately, Companies House and the Government Digital Service have reported significant early uptake: over a million people verified their identity for Companies House via gov.uk One Login since April (in the period discussed in the November 2025 update).

A preparation checklist that keeps this manageable

Use the checklist below to keep control of the process, especially if you have more than one company or hold both director and PSC roles.

Personal checklist

• Confirm which roles you hold: director, PSC, overseas director, LLP member (or equivalent).
• Verify your identity (online or via an ACSP).
• Store your Companies House personal code securely.
• Identify each company’s next confirmation statement date and plan to provide the personal code as part of that filing.
• If you are a PSC, identify your PSC window and plan the separate PSC submission where required.

Company checklist

• Ensure each director has completed verification ahead of the confirmation statement filing.
• Confirm who will submit the confirmation statement (internal team member or agent) and ensure they have the codes they need, handled securely.
• Check the Companies House register people tab for due dates and status indicators where shown.
• For any upcoming incorporations or director appointments, ensure individuals verify early so you can provide personal codes during the filing process.

Next steps

If you only take three actions:

1. Verify your identity (online or via an ACSP).
2. Store your personal code securely.
3. Ensure you provide the code in the right place for each role (confirmation statement for director roles, and the PSC service where required).

If you manage several companies, treat this as a mini project: capture roles, due dates and responsible filers in one place, then work through them methodically during the transition period.

What sole traders and landlords must do before April 2026.

Making Tax Digital for income tax (MTD IT) will become mandatory for many sole traders and landlords from 6 April 2026. It will change how you keep records and report income, and it will affect the way you plan your cashflow and manage deadlines. The timetable and thresholds are now confirmed, and the Autumn Budget 2025 has added some easements to the penalty regime rather than delaying the start date.

This guide explains who must join in April 2026, what MTD IT actually involves, and the practical steps to take now so you are ready before the 2025/26 tax year ends.

MTD IT in a nutshell

MTD IT is a new way for sole traders and landlords to report self-employment and property income to HMRC. Instead of keeping paper records and filing one self assessment tax return each year, you will:

• keep digital records of income and expenses
• send quarterly summary updates to HMRC from compatible software
• make end-of-year adjustments and send a final declaration through that software.

HMRC defines “qualifying income” for MTD as your total gross income in a tax year from self-employment and property, before expenses or tax, and uses that figure to decide your start date.

Official business population statistics show there were about 7m individuals in self assessment with self-employment or landlord income in 2023/24. Around 2.9m of these, roughly 42%, have qualifying income above £20,000 and are expected to join MTD IT in phases between 2026 and 2028.

MTD does not mean five full tax returns a year. Quarterly updates are short summaries of income and expenses pulled from your software, followed by an annual finalisation instead of today’s single self assessment return.

Who must join and when

MTD IT applies to individuals who file self assessment returns and have qualifying income from self-employment and/or property letting above certain thresholds.

The current rules are as follows.

• From 6 April 2026
  You must use MTD-compatible software if your qualifying income from self-employment and property exceeds £50,000 in the 2024/25 tax year.
• From 6 April 2027
  The requirement extends to those with qualifying income above £30,000 in the 2025/26 tax year.
• From 6 April 2028
  It is planned to extend to those with qualifying income above £20,000 in the 2026/27 tax year.

HMRC will look at your latest self assessment return, add up your total turnover from self-employment and property, and use that to decide when you must join MTD. Other income, such as employment, pensions or savings interest, does not count towards the MTD thresholds.

Based on 2023/24 data:

• about 864,000 individuals have qualifying income over £50,000 and are expected to join from April 2026
• another 1,077,000 are in the £30,000–£50,000 band and are expected to join from April 2027
• a further 975,000 fall between £20,000 and £30,000 and are due to join from April 2028.

If your qualifying income drops below £30,000 after you have joined, current guidance suggests you remain within MTD unless HMRC confirms otherwise. It is therefore worth treating MTD as a long-term change.

What changes for sole traders

If you are a sole trader with qualifying income above the relevant threshold, MTD will change how you track and report your business income.

You will need to:

• keep digital records of all business income and expenses in MTD-compatible software
• send four quarterly updates each tax year for each sole-trader business
• make any accounting and tax adjustments in an end of period statement
• finalise your overall tax position through a final declaration by the normal 31 January deadline.

You will still be responsible for:

• registering for self assessment when you start trading
• paying income tax and Class 2/4 national insurance under current rules for the 2025/26 tax year
• managing payments on account and balancing payments.

If you run more than one sole-trader business, you must keep separate digital records and send separate quarterly updates for each business.

What changes for landlords

Landlords with qualifying property income above the MTD thresholds will also have to move to digital record-keeping and quarterly updates. HMRC treats UK and overseas property income, and any joint lets, within the scope of MTD where it is taxed through income tax.

Key points for landlords

• You must keep digital records of rental income and allowable expenses for each property business.
• If you also trade as a sole trader, you must send separate quarterly updates for your rental business and your sole trader business.
• If you jointly let a property, you can choose to include either all income and expenses for those properties or only your share of the income in quarterly updates, but you must bring all expenses into the end-of-year calculations.
• Type of property does not affect MTD; it is driven by the level of taxable rental income, not by whether the property is a flat, house, furnished or unfurnished.

Surveys suggest many smaller landlords still keep manual records. One recent estimate found nearly 70% of landlords with one or two properties still use spreadsheets or paper. For those affected in April 2026, the next few months are an important time to move onto suitable software.

Key dates up to and after April 2026

The first mandatory MTD year for the more than £50,000 group will be the 2026/27 tax year, but preparation starts before that. The main dates to bear in mind are the following.

• 31 January 2026
  Deadline to file the 2024/25 self assessment tax return in the usual way.
• 6 April 2026
  Start of the 2026/27 tax year. If your qualifying income for 2024/25 was over £50,000, you must begin using MTD-compatible software from this date.
• 7 August 2026
  Deadline to send your first quarterly update for 6 April to 5 July 2026 (or 1 April to 30 June if you choose calendar quarters).
• 7 November 2026, 7 February 2027, 7 May 2027
  Deadlines for the remaining three quarterly updates for 2026/27.
• 31 January 2027
  You still file a “traditional” self assessment return for the 2025/26 tax year, even if you have started MTD for 2026/27.

From 2027/28, once MTD is fully bedded in, the aim is for you to finalise your tax position for each year directly from your software by the 31 January deadline, using your quarterly updates plus end-of-year adjustments.

What the Autumn Budget changed

Autumn Budget 2025 confirmed that MTD IT will start in April 2026 as planned. It did not change the thresholds or timetable but introduced easements and clarified how the penalty system will apply.

The main changes are as follows.

• Soft landing for penalties
  If you are required to use MTD IT from 6 April 2026, HMRC will not apply penalty points for late quarterly updates for the first 12 months, although late annual returns can still attract points.
• Extra time before late payment penalties
  All taxpayers in the new regime will have an additional 15 days before a late payment penalty is issued in their first year under the new system, creating a 30-day window to pay tax before penalties apply.
• Further deferrals and exemptions
  Some groups, such as those who receive trust and estates income, individuals who use averaging (for example, some farmers), those eligible for qualifying care relief and certain non-UK resident entertainers, will remain in standard self assessment until at least April 2027, with deputyship cases permanently exempt.

These measures aim to ease the transition without changing the core requirement for affected sole traders and landlords to be ready by April 2026.

Six practical steps to take before April 2026

If your qualifying income is above £50,000, or close to that level, the period between now and 6 April 2026 is the time to prepare. The following steps are a useful checklist.

1. Work out whether you are in scope

Use your latest self assessment figures to:

• total your gross self-employment income
• total your gross rental income (UK and foreign)
• add the two figures together.

If this combined figure for 2024/25 is above £50,000, you are in the April 2026 group. If it is between £30,000 and £50,000, you are likely to join in April 2027, and if it is between £20,000 and £30,000, you are expected to join in April 2028.

HMRC provides an online tool to check if and when you must use MTD IT.

2. Review your record-keeping

If you still keep paper records or basic spreadsheets, plan to move to digital bookkeeping software that:

• can capture income and expenses in real time
• is recognised by HMRC as MTD-compatible
• can handle more than one business if you trade and let property.

If you already use software, check with the provider that it will support MTD IT and how the quarterly update process will look in practice.

3. Decide how you want to structure your quarters

HMRC allows you to choose between standard update periods aligned with the tax year and calendar quarters, as long as you meet the same deadlines.

• Standard: 6 April–5 July, 6 July–5 October, 6 October–5 January, 6 January–5 April
• Calendar: 1 April–30 June, 1 July–30 September, 1 October–31 December, 1 January–31 March

Speak to whoever supports your bookkeeping about which option fits your accounting year and internal processes.

4. Clean up existing data

Use the remainder of 2025/26 to:

• reconcile bank accounts, debtor and creditor balances
• check that property income and expenses are complete and correctly categorised
• clear out duplicate or obsolete entries in spreadsheets or old systems.

Starting MTD with tidy opening data will make quarterly updates simpler and reduce the risk of avoidable errors.

5. Plan for cashflow and tax payments

Quarterly updates will give you more regular estimates of your tax bill, based on up-to-date records. HMRC expects this to reduce errors and the overall tax gap.

Use these estimates to:

• set aside tax more regularly
• adjust payments on account where appropriate
• identify profitable or loss-making activities earlier in the year.

Autumn Budget 2025 also confirmed an extended freeze on income tax thresholds, which will bring more taxpayers into higher bands over time, so keeping a close eye on estimated liabilities is sensible.

6. Consider voluntary early sign-up

You can choose to sign up early to MTD IT and join the pilot before you are mandated.

Early sign-up may help you:

• get used to the software and new processes with more support
• identify any issues before quarterly updates become mandatory
• test how quickly you can produce reliable data after each quarter end.

Take into account that, so far, only a small proportion of those expected to join in 2026 have taken part in the pilot, so software offerings and support are still evolving.

Get MTD-ready

MTD IT is no longer a distant policy idea. The start date, thresholds and core rules are set, and Autumn Budget 2025 has confirmed that April 2026 will go ahead, with some easing of penalties rather than a further delay.

For sole traders and landlords with qualifying income above £50,000, the rest of the 2025/26 tax year is the time to act. Checking whether you are in scope, choosing MTD-compatible software, tidying your records and planning for quarterly updates now will make the move to MTD far less stressful. If you are unsure about how these rules apply to your situation, seek tailored advice before April 2026 so you can enter the new system on the front foot.

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HMRC will stop sending most paper letters from spring as it accelerates its shift to digital communication.

Email alerts will replace automatic postal letters, directing taxpayers to view new documents in their personal tax account or the HMRC app. The change is part of HMRC’s digital by default plan, which aims for 90% of interactions to be online by the 2029/30 tax year and is expected to save £50 million per year in print and postage costs.

Only taxpayers who are digitally excluded, or those who actively opt out, will continue to receive letters by post. HMRC confirmed that anyone already using the HMRC app or a personal tax account will be among the first to move to digital notifications. When logging in, they will be prompted to provide or confirm their email address or mobile number. These details will be used solely to alert users that new correspondence is available in their online account.

HMRC stressed that taxpayers who do not use digital services will continue to receive paper letters. Safeguards will be in place to ensure that the elderly and those with disabilities can rely on traditional communication if needed.

Legislation in the Finance Bill 2025/26 will give HMRC the power to require digital contact details from users of its online services. The rollout will begin in spring 2026 and expand gradually as systems are updated.

HMRC states that the change will free staff to support those who most need help, while enhancing the speed and reliability of communications. Paper versions will remain available and must meet the same clarity standards as digital formats.

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What you need to know about compliance.

Preparing for an audit is rarely anyone’s favourite task, but it is part of running a resilient business. HMRC is under pressure to close the tax gap, completing around 316,000 compliance checks in 2024/25 and continues to invest in new staff and technology.

Against this backdrop, audits and compliance checks are unlikely to fade away. This guide explains what “audit” means in practice, how the 2025 Autumn Budget and current tax rules shape the compliance environment, and what you can do to prepare your business so that any audit or review is as smooth as possible.

Why audits and compliance matter in 2025/26

Government data shows that small businesses now account for the largest share of the tax gap by customer group, at 60% in 2023/24. Common reasons include errors, record-keeping problems and failure to take reasonable care. HMRC is responding with a mix of “upstream” measures, such as nudges and education, and traditional inquiries. Preventative measures now account for approximately 41% of HMRC’s compliance yield, up from 29% in 2020/21.

Overall compliance yield reached an estimated £48bn in 2024/25, up from £41.8bn the previous year, with every £1 spent on compliance bringing in about £23 for the Exchequer. This level of return means HMRC is likely to maintain, and possibly increase, its focus on risk-based reviews, data matching and sector-specific campaigns.

For business owners, this does not only mean a higher chance of inquiry. It also highlights the value of strong internal controls, sound governance and up-to-date tax and accounting records.

What we mean by a “business audit”

Clients often use “audit” to describe any deep review of their figures, but there are several distinct processes.

• Statutory financial audit
  This is a regulated review of your annual accounts under the Companies Act. Auditors test whether the accounts give a true and fair view and meet UK Generally Accepted Accounting Practice (UK GAAP) or International Financial Reporting Standards (IFRS) requirements.
• HMRC compliance check or tax inquiry
  This is a review of one or more taxes, such as corporation tax, VAT, PAYE or research and development (R&D) relief. HMRC may ask for explanations, source records and supporting documents, and can amend returns or raise assessments if it finds errors.
• Other audits and reviews
  Lenders, investors, regulators or group parents may request their own review, ranging from agreed-upon procedures to a full internal audit.

This guide focuses on statutory audits and HMRC compliance checks, as these affect most companies.

Who needs a statutory audit?

From financial years beginning on or after 6 April 2025, a private limited company may qualify for audit exemption if it meets at least two of the following criteria:

• annual turnover of no more than £15m
• assets worth no more than £7.5m
• 50 or fewer employees on average.

If your company meets these thresholds, it is usually treated as “small” and may choose not to have a statutory audit. However, an audit is still compulsory if, at any time in the year, the company:

• is a public company
• is a subsidiary that does not qualify for a group exemption
• carries out regulated activities such as banking, insurance or certain investment services
• has shares traded on a regulated market
• is a master trust pension scheme funder or certain other specified bodies.

Even where an audit is not required by law, it can still be requested. Shareholders who hold at least 10% of the shares (by number or value) can insist on an audit if they make a written request at least one month before the year end. Lenders, investors or potential buyers may also require audited accounts as part of their due diligence.

HMRC compliance checks and tax inquiries

HMRC compliance checks are an increasingly common part of the tax system. In 2024/25, HMRC completed about 316,000 compliance checks across all customer groups. These checks range from simple queries handled by letter to full records reviews.

Recent analysis shows the following.

• The overall tax gap in 2023/24 was 5.3% of theoretical liabilities, equal to £46.8bn.
• Corporation tax now accounts for about 40% of the tax gap by tax type, with the corporation tax gap percentage rising to 15.8% in 2023 to 2024.
• Small businesses are the largest contributor by customer group, at around 60% of the total tax gap.
• HMRC opened compliance checks into nearly 16% of R&D tax relief claims in 2023/24, underlining the level of scrutiny in this area.

HMRC uses data analytics, third-party information and cross-checks between taxes to identify apparent inconsistencies. Examples include:

• high director dividends compared with reported profits
• VAT returns that do not align with accounts or sector norms
• PAYE or Construction Industry Scheme (CIS) returns that suggest employment status risks
• large or unusual claims for reliefs, especially R&D and capital allowances.

For many businesses, a compliance check is not a sign of wrongdoing, but it still demands careful management.

How the Autumn Budget shapes the compliance environment

The Autumn Budget 2025 did not change headline rates of income tax, national insurance or VAT, and it left the main corporation tax rate at 25%, in line with the 2024 Corporate Tax Roadmap. The VAT registration threshold remains at £90,000 of taxable turnover (with a deregistration threshold of £88,000).

Key points for business owners include the following.

• Higher tax on investment income from 2026/27
  Ordinary and upper rates of dividend tax will increase by 2 percentage points from April 2026, which may influence profit extraction decisions and could feature in forward-looking audit and tax planning.
• Tighter focus on avoidance and non-compliance
  Budget and related HMRC reports highlight further work on promoters of tax avoidance schemes, anti-avoidance rules for company liquidations and strengthened action against directors who use phoenix arrangements or offshore structures to avoid tax.
• Investment in HMRC compliance and debt collection
  Additional funding for compliance teams and digital tools means more cases can be reviewed and debt followed up more quickly.

For audits and compliance checks, the message is straightforward: the rules around who must be audited and who must register for VAT are stable in 2025/26, but HMRC’s capacity and willingness to enforce those rules is increasing.

Getting audit-ready: Practical steps before any review starts

Whether you expect a statutory audit, a lender review or a possible HMRC inquiry, good preparation makes a real difference. The following habits help your year-end process and reduce the risk of problems.

1. Keep complete, timely records

• Use bookkeeping software that captures all sales, purchases and bank transactions.
• Keep digital copies of key documents, including contracts, lease agreements, invoices and payroll reports.
• Make sure you understand how your VAT, PAYE and CIS figures flow from the underlying records.

2. Reconcile regularly
   Monthly or quarterly reconciliations between the ledger and:

• bank statements
• supplier and customer balances
• VAT and PAYE submissions
• stock and work in progress.

3. Document judgments and estimates
   Areas such as revenue recognition, stock valuation, provisions and impairment require management judgment. Keep written explanations of the approach and assumptions used, as auditors and HMRC often ask for this supporting evidence.

4. Review director remuneration and dividends
   Check that directors’ salaries, benefits and dividends are supported by board minutes, dividend vouchers and tax calculations. With higher future tax on dividends and close attention on profit extraction, clear documentation is important.

5. Maintain clear tax working papers
   For each tax return, retain schedules showing how figures were derived, including reconciliations from accounts profit to taxable profit, capital allowances computations and relief claims. This helps you respond quickly to queries and reduces the risk of misunderstanding.

What to expect during a statutory audit

If your company requires, or chooses to have, a statutory audit for a period falling in 2025/26, the process usually follows these stages.

1. Planning meeting
   The audit team discusses your business model, key risks, systems and any changes since the prior year. They agree a timetable, key contacts and requested information.
2. Information request
   You receive a “prepared by client” (PBC) list of schedules and documents to provide before and during the audit, for example fixed asset registers, bank reconciliations, aged debtor and creditor reports and payroll summaries.
3. Fieldwork and testing
   Auditors test samples of transactions and balances, review controls and perform analytical procedures. They may attend stock counts or obtain confirmations from banks and major customers or suppliers.
4. Discussion of findings
   The audit team discusses any errors, adjustments or control observations with you. Many issues can be resolved through additional evidence or minor corrections.
5. Audit report and management letter
   Once the accounts are final, the auditors issue their opinion and, where appropriate, a separate letter setting out control recommendations.

You can make the audit more efficient by agreeing realistic deadlines, allocating an internal contact to co-ordinate responses and keeping communication open if issues arise.

What to expect during an HMRC compliance check

An HMRC compliance check normally starts with a letter. The letter explains which tax and period HMRC is looking at, what information it wants and the deadline for a response. In some cases, HMRC may phone first or request a meeting.

Typical features of a check include the following.

• Scope
  The check may be “aspect” based, limited to one issue or a full inquiry into an entire return.
• Information requests
  HMRC can ask for records it reasonably needs to check the position, such as invoices, bank statements, contracts, payroll data and supporting calculations. Where records are digital, HMRC may request data downloads.
• Time limits
  HMRC usually has four years to correct careless errors and up to 20 years in cases of deliberate behaviour, although exact limits depend on the tax and circumstances.
• Outcome
  The check may end with no change, an adjustment to tax due, penalties or agreement of a repayment. Penalties depend on behaviour (for example reasonable care, careless, deliberate) and whether you voluntarily disclose errors.
• Rights of review and appeal
  If you disagree with HMRC’s conclusions, you can request an internal review or appeal to the tax tribunal.

Responding promptly, providing clear evidence and keeping a full record of correspondence helps to keep the process manageable and supports your position if there is any disagreement.

Ongoing compliance habits that reduce audit risk

The same habits that make your year end smoother also reduce the likelihood and impact of inquiries. Consider building the following into your regular operations.

• Annual “health check” of accounts and tax
  Review your trial balance, control accounts and tax workings before year end. Look for unusual trends, missing balances or old unreconciled items.
• Review of high-risk areas
  Pay particular attention to VAT treatment, employment status, director transactions, use of personal assets in the business and any relief claims such as R&D or capital allowances. HMRC sees these as higher risk and has dedicated teams reviewing them.
• Up-to-date statutory books and filings
  Maintain accurate Companies House filings, shareholder records and board minutes. Discrepancies between legal records, accounts and tax returns can raise questions during both audits and compliance checks.
• Clear segregation of duties where possible
  Even in smaller businesses, separating responsibilities for authorising payments, recording transactions and reconciling accounts can reduce error and fraud risk.
• Training for finance and payroll staff
  Make sure staff understand current VAT rules, PAYE reporting, national minimum wage and benefits reporting. HMRC uses educational campaigns and targeted checks in these areas.

Closing thoughts

The 2025/26 tax year sits in a period of steady rules but rising scrutiny. Audit exemption thresholds have increased, yet many companies still need or choose an audit. HMRC’s focus on the tax gap means more attention on small and mid-sized businesses, with compliance activity supported by better data and stronger technology.

You cannot remove the possibility of an audit or inquiry, but you can control how ready you are. Consistent records, clear documentation of decisions and regular reviews put you in a strong position if questions arise. If you are unsure how the current rules or Autumn Budget 2025 announcements affect your company, seek tailored advice before year end so that you can approach any future audit with confidence.

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The Government has confirmed significant wage increases for workers from 1 April 2026. The national living wage (NLW) will rise by 4.1%, reaching £12.71 per hour for those aged 21 and over.

This increase will benefit around 2.4 million low-paid workers, adding £900 to the annual salary of a full-time worker.

Meanwhile, the national minimum wage (NMW) will rise by 8.5%, reaching £10.85 per hour for 18 to 20-year-olds. This will provide a £1,500 boost for full-time workers, further narrowing the gap with the NLW and progressing towards a unified adult rate. The NMW for 16 to 17-year-olds and apprentices will also increase by 6%, to £8 per hour.

While trade unions welcomed these pay rises, they will also add pressure on businesses, which are already burdened by the £24 billion increase in employers’ national insurance, effective from April 2025.

Paul Nowak, general secretary of the TUC, praised the wage increase as a positive step towards addressing the high cost of living. However, Rain Newton-Smith, CEO of the CBI, expressed concerns about the ongoing tax burden on businesses, warning that the economy risks stagnating if further short-term measures are taken without addressing long-term growth.

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