BUDGET 2026

Budget 2026 does not change the main rates of income tax on earnings, pensions or trading profits, and the main corporation tax rate remains 25% with the small profits rate at 19%. However, that apparent stability masks a number of targeted changes which will affect the tax paid by savers, landlords, business owners, investors and employers.

The most immediate theme is a widening difference between the tax treatment of earned income and income from assets. From 6 April 2027, taxable savings and property income will be charged at rates four percentage points above the equivalent main income tax rates. At the same time, the government is tightening one relief available on business sales, creating a potentially much more generous relief for a narrower group of founders, and adjusting the incentives for investment in plant and machinery.

Several changes are also aimed at smaller businesses and employees. The trading allowance rises to £3,000, approved mileage rates become more generous for high-mileage drivers, and the tax-advantaged share option regime becomes more flexible. There are also important VAT changes for online sellers and businesses buying services from overseas.

Most of the significant measures start on 1 or 6 April 2027, although some begin earlier or later. That gives taxpayers a useful planning window, but it does not mean transactions should be brought forward or delayed automatically. The right answer depends on the facts, and in some areas the detailed legislation is still being finalised.

 

Why will savings and property income become more expensive?

From 6 April 2027, the basic, higher and additional rates applying to savings income will be 24%, 44% and 49%. The same rates will apply to property income in England, Wales and Northern Ireland, subject to the powers of the devolved governments. This is a further increase on top of the rise already planned for 2027/28, so savings and property income will be taxed four percentage points above employment income, pension income and trading profits at the corresponding bands.

The personal savings allowance is not being abolished. It remains £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, while additional rate taxpayers continue to receive no allowance. The £1,000 property allowance also remains in place, subject to its existing restrictions. The important point is that once income is taxable, the rate applied to it will be higher.

The Budget also changes the ordering rules used in an income tax calculation. Property income will be taxed after other income and before savings and dividend income, and allowances and reliefs will generally have to be set first against other income. In some cases that can matter as much as the headline rate increase because it may leave more savings or property income exposed at 24%, 44% or 49%.

Example

Naomi is a higher rate taxpayer and receives £2,500 of bank interest. Her £500 personal savings allowance leaves £2,000 taxable. At 40%, the tax would be £800. From 6 April 2027, at 44%, the tax becomes £880. The extra £80 is modest in isolation, but the effect becomes much larger for someone with substantial deposits or bond interest outside tax-free wrappers.

Example

Martin has taxable rental profit of £15,000 and his other income has already used his personal allowance and basic rate band. Ignoring other interactions, tax on the rental profit rises from £6,000 at 40% to £6,600 at 44%. The direct cost of the rate change is £600 a year.

For savers, the obvious first step is to make full use of tax-free wrappers where they remain appropriate. The cash ISA limit is staying at £20,000 rather than being reduced, which becomes more valuable when interest outside an ISA can be taxed at up to 49%. Married couples and civil partners should also review whether cash and investments are held in a way that uses both personal savings allowances and lower rate bands.

Landlords should resist the temptation to see incorporation as an automatic answer. A company pays corporation tax rather than the new property income rates, but moving an existing portfolio can trigger capital gains tax (CGT), stamp duty land tax, refinancing costs and lender issues. The better starting point is to review ownership, financing, available allowances and the timing of genuine revenue expenditure before making structural changes.

 

What is happening to Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR) continues to tax qualifying gains at 18%, but its lifetime limit will fall from £1 million to £500,000 for qualifying disposals made on or after 6 April 2027. Anyone who has already used £500,000 or more of their existing lifetime limit may therefore have no BADR limit left once the new restriction applies.

For an owner-manager already planning a sale, the timing can matter. Preserving the additional £500,000 of lifetime limit available before April 2027 can save up to £30,000, because that slice of gain is taxed at 18% rather than the standard 24% higher CGT rate. However, the transaction should not be accelerated purely to secure that saving if commercial terms are not ready.

Example

Suppose a shareholder has a qualifying gain of £1.2 million and their full BADR lifetime limit is available. Before 6 April 2027, £1 million can qualify for BADR at 18%, with the remaining £200,000 taxed at 24%. From 6 April 2027, only £500,000 can qualify for BADR, leaving £700,000 at 24%. The difference in CGT is £30,000.

There are also anti-forestalling provisions for contracts entered into before 6 April 2027 but completed later, and for certain reorganisations and exchanges of securities. Signing a contract before the deadline is therefore not necessarily enough to preserve the old limit. Anyone contemplating a sale around the year end should establish the tax date of disposal before assuming that the current rules will apply.

 

Could the new founders' relief be more valuable?

Possibly. Budget 2026 proposes a new founders' relief from 6 April 2027 which would tax qualifying gains at 10%, subject to a £10 million lifetime limit. For somebody who genuinely qualifies, that is dramatically more valuable than BADR. The catch is that founders' relief is intended for founders and significant early investors in high-growth or innovative UK companies, not as a general replacement for BADR.

The detailed conditions are still subject to technical consultation. The proposals include requirements around the founder's original stake, a minimum holding period, UK residence, the scale of the company and evidence of high growth or innovation. The company would also need to remain a trading company, or the holding company of a trading group, and satisfy the relevant UK presence conditions. But what is clear is that the government expects this relief to be very narrow in scope - with an estimated 600 claims per year cited.

This means an owner should not delay a sale merely because a 10% rate has been announced. Many ordinary owner-managed businesses will not satisfy the gateway conditions. On the other hand, anyone who might qualify should test the conditions before rushing to complete a sale before April 2027 simply to preserve the larger BADR limit.

Example

A founder realises a £5 million gain. If the gain is taxed using the post-April 2027 BADR limit, £500,000 would be taxed at 18% and the remaining £4.5 million at 24%, giving CGT of £1.17 million before considering the annual exempt amount or losses. If the gain instead qualifies fully for founders' relief at 10%, the tax would be £500,000. The potential difference is therefore substantial, but only if the final confirmed conditions are met.

Potential claimants should start preserving evidence now. Historic cap tables, shareholder agreements, Companies House filings, board minutes, payroll data, turnover records and evidence of UK activities may all become important. Reconstructing the early history of a company after a sale will be much harder than maintaining a file as the business grows.

 

What does the Budget do to capital allowances?

There are two changes to plant and machinery allowances. The main-rate first-year allowance increases from 40% to 50% for qualifying expenditure incurred on or after 1 January 2027. In the opposite direction, the main-pool writing-down allowance falls from 14% to 12% for corporation tax periods beginning on or after 1 April 2027 and income tax periods beginning on or after 6 April 2027.

For many smaller businesses, the increase in the first-year allowance will make no practical difference because the £1 million annual investment allowance (AIA) already gives 100% relief for qualifying expenditure. Companies may also be able to claim full expensing on qualifying new and unused plant and machinery. The 50% allowance is most useful where those more generous reliefs are not available or have already been used, including certain leasing expenditure and expenditure above the AIA limit.

The reduction in the writing-down allowance matters to businesses with existing main-pool balances because relief on those balances will be obtained more slowly. Asset-intensive businesses can therefore experience both sides of the reform: more relief up front on some new expenditure, but slower relief on the balance carried forward.

Example

A plant-hire company spends £300,000 on qualifying new equipment on 1 February 2027 after using its full AIA. Full expensing is unavailable because the equipment will be leased. At a 40% first-year allowance, the immediate deduction would have been £120,000. At the new 50% rate it is £150,000, accelerating an extra £30,000 of relief into the first period.

Businesses should not delay commercially necessary expenditure merely to obtain the 50% allowance. If AIA or full expensing provides 100% relief, waiting produces no extra deduction. A better approach is to prepare a capital expenditure schedule and identify which assets fall into the main rate pool, special rate pool or other categories, then allocate the available reliefs in the most effective order.

 

What changes for small side businesses?

The trading allowance will rise from £1,000 to £3,000 from 6 April 2027, and the self-assessment reporting threshold for trading income will also increase to £3,000. This is aimed at people with small-scale trading or miscellaneous income, including casual services, online content, tutoring, craft sales and similar activities.

The £3,000 test is based on gross receipts, not profit. Someone with sales of £3,500 and costs of £2,500 cannot treat the activity as being within the allowance simply because the profit is only £1,000. Where receipts exceed the allowance, the individual can generally compare deducting the £3,000 allowance with deducting actual expenses and capital allowances.

Example

Ellie sells handmade stationery at local markets. Her 2027/28 receipts are £2,800 and her actual costs are £900. Full trading allowance relief can reduce the taxable profit to nil. If she instead deducts actual expenses, the taxable profit would be £1,900. In this case, the allowance is clearly better.

The opposite can also be true. If receipts are £8,000 and allowable costs are £6,000, deducting the £3,000 allowance leaves taxable profit of £5,000, whereas actual expenses leave only £2,000. The availability of a larger allowance does not mean it should automatically be claimed.

The property allowance is not being increased. Someone with a small trade and a small amount of property income therefore needs to apply the two regimes separately. Records should also continue to be kept even if the trading allowance removes the immediate tax charge or reporting requirement.

 

Are employee share schemes becoming more generous?

Yes. The Company Share Option Plan is being rebranded as Enterprise Management Incentives 2, or EMI2, and its individual option limit will double from £60,000 to £120,000 from 6 April 2027. The existing interaction with the £250,000 individual EMI limit is also being removed, allowing an eligible employee to hold the full amount under both schemes. The maximum EMI2 exercise period will increase from ten years to 15 years.

Separate improvements are being made to EMI. The window in which certain options can be exercised after a disqualifying event will increase from 90 to 180 days, and the separate grant notification will be removed for options granted on or after 6 April 2027, with the grant reported through the end-of-year return instead.

For growing companies, this creates a larger tax-advantaged equity incentive without necessarily resorting to an unapproved option arrangement. A business already using EMI or the current CSOP should nevertheless review its articles, shareholder authorities, option pool and valuation position before making additional awards. The statutory limit may rise, but that does not by itself authorise the company to issue more shares.

 

What does the Budget mean for ISAs and first-time buyers?

The planned reduction in the cash ISA limit has been dropped, so the adult ISA subscription limit remains £20,000. That becomes more valuable in the context of the higher savings income tax rates from April 2027. Someone expecting interest above their personal savings allowance should therefore consider using available ISA capacity before taxable interest starts to face rates of 24%, 44% or 49%.

A new First Time Buyer ISA is planned from April 2029 and will replace the Lifetime ISA for new savers. It is intended to provide a 25% government bonus when the account is used to buy a qualifying first home, subject to a £450,000 property price cap and a maximum government bonus of £20,000. Existing Lifetime ISA holders can continue to contribute under the current rules.

There is also an immediate change for existing Lifetime ISA holders buying a first home above the £450,000 cap. The withdrawal charge for that circumstance has been reduced from 25% to 20%, so the government bonus is effectively recovered without also taking part of the saver's own contribution. Other unauthorised withdrawals continue to attract the 25% charge.

 

What is changing for mileage and travel expenses?

The approved mileage rate for an employee or self-employed person using their own car or van is now 55p per mile for the first 10,000 qualifying business miles. Budget 2026 makes that rate permanent and increases the rate above 10,000 miles from 25p to 35p from 6 April 2027.

Employers can reimburse up to the approved amount without income tax or NI. Where an employer pays less, an employee may be able to claim mileage allowance relief on the shortfall. The higher second-tier rate is particularly relevant to employees who drive long distances for work, such as sales staff, carers and engineers.

Example

Dan drives 15,000 qualifying business miles in 2027/28 using his own car. The approved amount is £5,500 for the first 10,000 miles and £1,750 for the remaining 5,000 miles, giving a total of £7,250. Employers operating their own reimbursement rates should update policies and payroll or expense systems before April 2027.

The usual distinction between business travel and ordinary commuting remains. A higher mileage rate does not turn travel between home and a permanent workplace into a qualifying business journey.

 

What should employers prepare for?

Mandatory payrolling of benefits in kind is being phased in. From 6 April 2027, company cars, vans, car and van fuel and medical benefits will need to be payrolled. Most other taxable benefits and expenses are due to follow from 6 April 2028, while employment-related loans and employer-provided living accommodation remain outside mandatory payrolling for the time being.

Payrolling means the income tax on the benefit is collected through Real Time Information during the year, but Class 1A NI remains an employer liability. Employers will need benefit values early enough for payroll, procedures for mid-year changes and clear communications so that employees understand why their net pay or tax code may change.

A sensible preparation exercise is to run a parallel reconciliation before mandatory payrolling starts. Compare the benefit records, payroll population, P11D values and expected Class 1A NI position while there is still time to correct inconsistencies.

 

What are the main VAT changes?

There are several VAT measures, but two are particularly relevant to smaller and growing businesses. From October 2027, online marketplaces will become responsible for collecting VAT on relevant consumer sales made through their platforms by UK VAT-registered businesses and by other UK businesses whose annual sales exceed £90,000 on that particular platform.

The £90,000 platform threshold is not a replacement for the ordinary VAT registration threshold. A business must still consider its taxable turnover across all sales channels when deciding whether it needs to register. A seller using several marketplaces, a direct website and physical sales can therefore fall below the marketplace threshold on each individual platform while still exceeding the normal VAT registration threshold overall.

Example

Oak & Thread is not VAT registered. It sells £85,000 of new goods through one marketplace and £70,000 through another. Neither platform individually exceeds the £90,000 threshold for the new collection mechanism, but total business sales are £155,000. The business must therefore consider the ordinary VAT registration rules. Once registered, relevant sales through both marketplaces would fall within the marketplace collection rules.

The second important change affects services bought from overseas. From 1 April 2027, the business-to-business reverse charge for overseas services will apply only where the UK customer is actually VAT registered. If a UK business is not registered, the overseas supplier will generally be required to charge UK VAT instead.

That can create a real cost for non-registered and exempt businesses buying software subscriptions, online advertising, consultancy, cloud hosting or similar services from abroad, because the VAT may be irrecoverable. Businesses with significant overseas service costs should identify them now and reflect the change in budgets and supplier negotiations.

Mandatory VAT e-invoicing is also planned from April 2029. The detailed technical specification is still to come, so businesses do not need to redesign systems immediately. However, anyone replacing accounting or finance software before then should ask whether the system will be able to support structured e-invoicing, invoice validation and the necessary audit trail.

 

Does the Budget change pensions and inheritance tax again?

The major inheritance tax (IHT) change bringing most unused pension funds and pension death benefits into an estate from 6 April 2027 was already legislated before Budget 2026. The Budget mainly adds practical changes around administration rather than reversing that policy.

The two-year rule for pension and lump sum death benefits is being removed for payments made on or after 28 October 2026, so a payment will no longer become taxable solely because it is made more than two years after the scheme administrator knew, or should have known, of the member's death. There will also be a route for a prospective personal representative to direct a pension scheme administrator to pay IHT to HMRC where the relevant conditions are met.

The planning message remains the same: pension nominations, wills, estate liquidity and the intended recipients of pension wealth need to be reviewed together before April 2027. For many families, pension savings can no longer be treated as a separate pot sitting outside the IHT calculation.

 

What else should businesses know?

The corporation tax framework is broadly unchanged. The main rate remains 25%, the small profits rate remains 19% and the £50,000 and £250,000 profit thresholds remain, subject to the usual associated-company and short-period adjustments. That stability is useful when comparing incorporation, investment and extraction decisions, but it does not remove the need to consider the other Budget changes alongside corporation tax.

For research and development claims, the separate Claim Notification Form will be removed for claims made on or after 1 April 2027 and the Additional Information Form will be simplified later in 2027. The change removes a procedural hurdle but does not relax the underlying conditions or evidence requirements.

Making Tax Digital for Income Tax taxpayers joining in April 2027 will receive a further soft landing for quarterly updates in 2027/28, with no late-submission penalty points for those updates. The updates must still be filed before the final return can be submitted, so the easement is not a filing holiday.

 

Do the frozen allowances matter as well?

Yes. Budget announcements tend to focus attention on rates, but the personal allowance and the main income tax bands remain frozen for 2027/28. The personal allowance stays at £12,570 and the basic rate band at £37,700. The point at which the personal allowance starts to be withdrawn also remains £100,000. As earnings, pensions and investment income rise, more income can therefore be pulled into higher tax bands even without a further increase in the headline rates on those sources.

That effect is particularly relevant where the same taxpayer also has savings or property income. A pay rise or larger pension can use more of the basic rate band, leaving a greater proportion of interest or rental profit exposed to the new 44% rate. Once adjusted net income exceeds £100,000, the personal allowance is withdrawn at £1 for every £2 of excess income, creating the familiar 60% effective marginal rate on the affected slice before considering the higher rates applying to savings or property income.

The dividend allowance also remains £500, and the dividend tax rates are unchanged. This creates a wider gap between the treatment of dividends and property or savings income, but that does not automatically make incorporation or a company investment structure more attractive. Corporation tax, extraction tax, administrative costs and the tax position on an eventual disposal all still need to be considered together.

For pensioners on modest incomes, a temporary pension tax allowance will operate for 2027/28 to 2029/30 so that someone whose total income does not materially exceed the full new state pension does not face a small income tax bill purely because the state pension has risen above the personal allowance. The relief is tightly targeted and withdrawn as income rises, so other taxable income such as interest or rent can affect entitlement.

 

Are there any shorter-term measures worth noting?

A number of Budget measures have an earlier or more immediate cash-flow effect even though they are not the main focus of the long-term tax reforms. The temporary 0% VAT rate for qualifying domestic electricity continues until 30 June 2027, after which supplies that would normally be subject to the 5% reduced rate revert to that treatment. The temporary 5p-per-litre fuel duty cut is also extended to 30 June 2027, with the main rates returning to the pre-cut level and then being uprated from 1 July 2027.

Businesses with large fuel costs should therefore budget for a noticeable step change rather than assuming costs will rise only gradually with inflation. The same applies to households or owner-managed businesses where domestic energy costs form a significant part of cash-flow planning. These measures are temporary by design, so they should not be built into long-term forecasts as permanent savings.

The Budget also confirms that the National Living Wage for workers aged 21 and over will rise to £13.21 an hour from 1 April 2027, with increases for younger workers and apprentices. Although this is not a tax measure, it matters to employers because it feeds directly into payroll costs and can interact with pension contributions, holiday pay and other employment costs. Employer NI remains at 15% above the secondary threshold, so the total cost of a pay increase is greater than the increase in gross wages alone.

For employers, the practical lesson is to look at April 2027 as one combined payroll event rather than a series of isolated changes. Wage rates, payrolled benefits, mileage policies and share incentives may all need updating at around the same time. Preparing the data and employee communications in advance should reduce the risk of errors when several changes take effect together.

 

What should you do before April 2027?

The first step is to identify which Budget measures actually affect you. The headline announcements cover very different groups, and there is little value in changing a business or investment structure merely because a tax rate is moving.

Savers should review ISA capacity, the ownership of cash and investments between spouses or civil partners and whether taxable interest is likely to exceed the personal savings allowance. Landlords should estimate the additional cost of the new property rates and consider ownership, borrowing and the timing of genuine deductible expenditure before looking at more fundamental restructuring.

Business owners expecting a sale should establish whether BADR is likely to apply and how much of the existing lifetime limit remains. Where a sale is already commercially advanced, completion before 6 April 2027 may preserve up to £500,000 of additional BADR capacity. However, owners of genuinely high-growth or innovative companies should also test whether the new founders' relief could be in point before accelerating a transaction.

Businesses planning significant capital expenditure should map which purchases can qualify for AIA or full expensing and which are more likely to rely on the new 50% first-year allowance. Employers should review mileage policies, benefits data and share option plans. Small traders should understand that the £3,000 trading allowance is a receipts test and compare it with actual expenses rather than assuming it is always the better choice.

Online sellers should map each sales channel and distinguish the ordinary VAT registration threshold from the new platform collection threshold. Businesses buying services from overseas should quantify the VAT cost that may arise from April 2027 if they remain unregistered. Those replacing accounting systems should also keep the 2029 e-invoicing timetable in mind.

Budget 2026 therefore rewards preparation more than dramatic action. A number of the changes are generous in the right circumstances, but others increase the cost of holding assets or delay the relief available. The most useful exercise is to compare the current position with the post-April 2027 rules now, while there is still time to change the timing of a transaction, use an allowance or adjust a business process for genuine commercial reasons.