As far as benefits in kind are concerned, there were both winners and losers in the Budget.

Winner – easement for plug-in hybrid electric vehicles

Under the company car tax rules, the taxable amount depends predominantly on the list price of a car and its CO2 emissions.

From 1 January 2025, new European Union and United Nations emissions standards were introduced which found the CO2 emissions for plug-in hybrid electric vehicles (PHEVs) to be higher than previously thought. Normally, an increase in the CO2 emissions figure would mean an increase in the taxable amount.

However, an easement will mean that, for a limited period, the amount charged to tax under the benefit in kind rules will be determined by reference to a nominal CO2 emission figure of 1g/km. Where a car’s CO2 emissions are between 1 and 50g/km, the appropriate percentage depends on the car’s electric range.

To be eligible for the easement the following conditions must be met:

• the vehicle was first registered on or after 1 January 2025;
• its CO2 emissions figure is 51g/km or above;
• it was registered under an emissions standard other than Euro 6d-ISC-FCM or Euro 6e; and
• the car’s electric range is at least one mile.

The easement will apply retrospectively from 1 January 2025.

Anyone accessing an eligible PHEV company car before 6 April 2028 will be able to benefit from the easement until the arrangements are varied or renewed or, if earlier, 5 April 2031.

Winner 2 – expansion of workplace benefits relief

Currently, reimbursed expenses are only tax-free if the employee would be entitled to a tax deduction had they met the cost themselves.

However, from 6 April 2026, employers who reimburse the costs of eye tests, flu vaccines and home working equipment will be able to do so tax-free.

Winner 3 – delayed start to ECOS changes

Legislation to bring certain cars made available to employees under an employee car ownership scheme (ECOS) within the tax charge for company cars had been due to come into effect on 6 April 2026. The changes will not be introduced until 6 April 2030.

Losers – removal of relief for homeworking expenses

An administrative easement that allowed employees to claim a flat rate deduction of £6 per week for the additional costs of working from home is being removed from 6 April 2026. This is worth £124.80 to a higher rate taxpayer and £62.40 to a basic rate taxpayer.

Employers will still be able to make a tax-free payment of £6 per week for additional homeworking costs, and employees will still be able to claim a deduction for the actual extra cost (although this will involve more work).

During the Chancellor’s Budget speech, savers received the unwelcome news that the rate of tax on savings income is to increase and the cash ISA limit to fall. Both changes will take effect from 6 April 2027.

Taxation of savings income

The taxation of savings income is quite complex as a number of factors come into play.

The first complication is the personal savings allowance, which is available to some taxpayers but not all. Basic rate taxpayers have a personal savings allowance of £1,000, whereas for higher rate taxpayers, the allowance is only £500. Additional rate taxpayers do not receive a personal savings allowance. Where available, the personal savings allowance is in addition to the personal allowance.

The second complication is the savings starting rate band. The savings starting rate of tax of 0% applies to savings income within the savings starting rate band. This is set at £5,000. However, if the taxpayer has non-savings income in excess of their personal allowance, the savings starting rate band is reduced pound for pound. Individuals with taxable non-savings income of £5,000 and above do not benefit from the savings starting rate band.

Where an individual has savings income that is not sheltered by the personal allowance or the personal savings allowance and which does not benefit from the savings starting rate, it is currently taxed at the normal income tax rates, i.e. 20% where it falls in the basic rate band, 40% where it falls within the higher rate band and at 45% where it falls in the additional rate band.

However, this is to change. From 6 April 2027, savings income will be taxed at the relevant savings tax rate. The rates will be two percentage points higher than the standard income tax rates. Consequently, for 2027/28, savings income will be taxed at 22% where it falls in the basic rate band, at 42% where it falls in the higher rate band and at 47% where it falls in the additional rate band.

In a further twist, the income tax ordering rules are also changed from 6 April 2027, moving away from the principle that reliefs and allowances are allocated so as to give the lowest tax bill. From that date, the personal allowance will be allocated first against employment income, trading and pension income, rather than against savings and property income which are taxable at a higher rate.

Cash ISAs

Savers are advised to make use of their cash ISA allowance to keep interest on savings tax-free. With the rise in the savings tax rates from 6 April 2027, using the cash ISA allowance will generate greater tax savings.

However, for those who prefer to keep their savings in cash rather than investing in stocks and shares, there is more bad news. From 6 April 2027, savers under 65 will only be able to invest £12,000 a year in a cash ISA; the ISA limit is to remain at £20,000, but for under 65s using their full allowance, at least £8,000 of that must be invested in a stocks and shares ISA. However, savers aged 65 and over can invest the full £20,000 in a cash ISA.

Existing ISAs are unaffected by the change.

In her tax-raising Budget on 26 November 2025, the Chancellor announced that the dividend ordinary rate and the dividend upper rate are to rise by two percentage points from 6 April 2026. This will affect director/shareholders in personal and family companies who extract profits in the form of dividends.

How dividends are taxed

Dividends have their own tax rates, which are lower than the standard income tax rates. Dividend income which is not sheltered by the personal allowance or the dividend allowance is treated as the top slice of income. It is taxed at the dividend ordinary rate where it falls in the basic rate band, at the dividend upper rate where it falls in the higher rate band and at the dividend additional rate where it falls in the additional rate band.

For 2025/26, the dividend ordinary rate is 8.75%, the dividend upper rate is 33.75% and the dividend additional rate is 39.35%.

From 6 April 2026, the dividend ordinary rate rises to 10.75% and the dividend upper rate rises to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

All individuals are entitled to a dividend allowance, which is £500 for 2025/26 and remains at this level for 2026/27. The dividend allowance acts as a nil rate band; dividends sheltered by the allowance are tax-free. However, it uses up part of the band in which it falls.

Impact of the rise

Where profits are extracted as dividends and the shareholder is a basic or higher rate taxpayer, they will pay an additional £20 in tax on every £1,000 of dividends paid in 2026/27 as compared to 2025/26. A shareholder taking £50,000 of dividends a year will pay an additional £1,000 in tax.

Additional rate taxpayers are unaffected by the change.

Beating the rise

Where a personal or family company has retained profits, consideration should be given to paying dividends before 6 April 2026 if the tax hit will be lower than if the dividend is paid on or after that date. However, if dividends have already been paid to use up the basic rate band, there is no point paying a dividend if it would be taxed at the dividend upper rate if paid before 6 April 2026 and at the dividend ordinary rate if paid on or after that date; 10.75% is lower than 33.75%.

In a family company scenario with an alphabet share structure, to minimise the total tax paid on profits extracted as dividends, make sure shareholders’ dividend allowances and basic rate bands are used up before paying dividends taxable at the higher rates.

Consideration could also be given to extracting profits in other ways, such as employer pension contributions or tax-free benefits in kind.

A director’s loan account is simply a means of keeping track of transactions between the director and the company of which they are a director. Where the company is a personal or family company, the director may borrow from the company or lend money to the company. Similarly, the director may meet expenses of the company, or the company may pay the director’s personal bills. These transactions are recorded in the director’s loan account. Dividend or salary payments may also be credited to the account.

If the director’s account is overdrawn at the end of the company’s accounting period or at any point during the tax year, there may be tax implications to address.

Close companies

If the company is close, as personal companies and most family companies are, there will be tax consequences for the company if the director’s account is overdrawn at the company’s year end. Broadly, a close company is one that is under the control of five or fewer participators or any number of participators if those participators are directors. A participator is someone who has an interest in the capital or income of the company.

The action that the company needs to take in respect of an overdrawn director’s loan account depends on whether the account is still overdrawn at the corporation tax due date, which is nine months and one day after the end of the accounting period.

If the loan has been repaid within this time frame, the company must disclose the loan on form CT600A when they prepare their corporation tax return, notifying HMRC of the amount that was outstanding at the end of the accounting period and the date(s) on which the repayments were made.

If the account remains overdrawn at the corporation tax due date, the company must pay section 455 tax on the outstanding loan balance along with their corporation tax. Anti-avoidance provisions exist to prevent the loan being repaid and then reborrowed in a bid to avoid the section 455 charge.

Section 455 tax

The company must pay section 455 tax on the amount by which the director’s account remains overdrawn nine months and one day after the company year end. The rate of section 455 tax is aligned with the upper dividend rate (currently 33.75%). The tax is paid with the corporation tax but crucially is not corporation tax.

Section 455 tax is a temporary tax in that it is repayable nine months and one day after the end of the accounting period in which the loan is repaid.

Clearing the loan, whether by an injection of cash, declaring a dividend or by paying a bonus, will prevent a section 455 liability from arising. However, this will not always be the best option. If the loan is cleared by a dividend or a bonus, this will trigger tax and (in the case of a bonus) National Insurance liabilities which may be greater than the section 455 tax. It may be cheaper to pay the section 455 tax and to clear the loan at a later date when it can be done more tax efficiently.

Benefit in kind charge If the loan balance exceeds £10,000 at any time in the tax year, a tax charge will arise under the benefit in kind provisions by reference to the difference between interest on the loan at the official rate and that paid by the director (if any). The employer will also pay Class 1A National Insurance on the taxable amount.

Many employers have a social event for employees around the Christmas period. This may take the form of a Christmas party or dinner or another social event, such as wreath-making and cocktails. When planning the event, it is important to consider the tax and National Insurance implications up front. Although there is a specific tax exemption for annual parties and other functions, there are conditions that must be met for the exemption to apply. Ensuring that your Christmas event meets these conditions at the planning stage will prevent employees being hit with a tax charge on the associated benefit.

Conditions

To qualify for the exemption, the party or function must be:

• an annual party or function; and
• available to the employer’s employees generally or to those at a particular location.

Where there is a single annual party or function in the tax year, the cost per head must not exceed £150. Where there is more than one annual party or function in the tax year, the combined cost must not exceed £150 for all events to fall within the scope of the exemption. The cost per head is found by dividing the total cost of the party or function plus the cost of any transport incidentally provided by the total number of attendees (employees plus guests).

Watchpoints

Only annual events qualify for the exemption. As the name suggests, these are events that are held every year, such as an annual staff Christmas party. If the event is a one-off event, the exemption will not apply. This is the case regardless of whether the event is open to all employees and the cost per head is not more than £150.

To fall within the exemption, the event must also be open to all employees or all those at a particular location. HMRC have confirmed that departmental events qualify. However, an event for senior staff only would not fall within the scope of the exemption.

When calculating the cost per head, VAT is included even if this is subsequently recovered. It is also important to include guests as well as employees when performing the calculation. However, if the cost per head is more than £150, the full amount is taxable, not just the excess over £150. Where an employee brings a guest and the cost per head exceeds £150, the employee will be taxed on their attendance and that of their guest.

If there is more than one annual function in the tax year, the functions will be exempt as long as the combined cost per head is not more than £150. Where this limit is exceeded, the employer can choose how best to use the exemption. When allocating the exemption, remember to consider the impact of guests – it is better to leave an event costing £100 per head attended only by employees in charge than one costing £80 per head which is attended by employees and their partners as here the taxable amount will be £160 (2 x £80).

Consider a PSA

If a tax charge does arise in respect of a Christmas event, as will be the case, for example, if the event is not an annual event, the employee will suffer a benefit in kind tax charge. The taxable amount will be the cost per head for the employee and any associated guests. The employer will also suffer a Class 1A National Insurance charge.

To maintain the goodwill element of the event, the employer may wish to include the benefit within a PAYE Settlement Agreement and meet the associated tax liability on the employee’s behalf.

It used to be possible to report errors in a VAT return to HMRC on form VAT652. This is no longer the case; form VAT652 was withdrawn from 5 September 2025. This means that now, where an error has been made in a VAT return, the error must be corrected in one of the following ways:

• updating the next VAT return;
• making the correction online; or
• writing to HMRC to notify them of the correction.

Updating the next VAT return

An error can be corrected by making an adjustment in the next VAT return if the value of the error is £10,000 or less or if the error is between £10,000 and £50,000 and does not exceed 1% of the box 6 figure (net outputs) in the VAT return for the period in which the error was discovered.

A correction can only be made by updating the next VAT return if the error was made carelessly.

The net value of the error is the difference between the additional amount owed to HMRC as a result of the error and the additional refund due from HMRC as a result of the error.

Correcting the error online

If the value of the error is more than £50,000, is between £10,000 and £50,000 and more than 1% of the box 6 figure in the VAT return  for the period in which the error was discovered or was made deliberately, it must be notified to HMRC rather than being corrected in the next VAT return. The default route for doing this is to make the correction online. The trader will need to sign into their Government Gateway account.

When reporting the error online, the following information must be provided:

• how each error arose;
• the VAT accounting period in which it occurred;
• whether it was an input tax error or an output tax error;
• the VAT underdeclared or overdeclared in each VAT period;
• how the VAT over or under declaration was calculated;
• whether any of the errors resulted in the payment of an amount to HMRC that was not due; and
• the total amount to be adjusted.

Refund claims can only be accepted where all the above information is provided.

Notifying in writing

If the trader is unable to use the online service, they will need to notify HMRC in writing of the errors if they are of a type that cannot be corrected in the next VAT return. The letter must include the trader’s VAT registration number and the information listed above. It should be sent by post to:

BT VAT

HMRC

BX9 1WR

Time limit

Errors should be corrected as soon as possible, but time limits do apply.

The time limit for correcting errors in a VAT return is four years from the end of the prescribed period in which the error occurred where the error related to output tax or over-claimed input tax, and four years from the due date of the return for the prescribed accounting period where the error related to under-claimed input tax.

The four-year time limit does not apply to deliberate errors.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is mandatory from 6 April 2026 for self-employed traders and landlords whose combined gross trading and business income in 2024/25 is £50,000 or more. Those within MTD for ITSA must maintain digital records and submit quarterly updates and a final declaration to HMRC electronically using software compatible with MTD for ITSA.

As the name suggests, MTD for ITSA relies on digital record-keeping and communication. HMRC recognise that not everyone is able to operate in a digital world and those who they accept as being ‘digitally excluded’ can apply for an exemption from MTD for ITSA.

Meaning of ‘digitally excluded’

HMRC acknowledge that there are various reasons why a person may consider themselves digitally excluded. For example, a person may be digitally excluded because:

• their age, a health condition or a disability prevents them from using a tablet, computer or smartphone to keep digital records and to submit returns to HMRC;
• they are a practising member of a religious society or order whose beliefs are incompatible with using digital communications or keeping digital records and they do not use a computer, tablet or smartphone for business or personal use; or
• they cannot get internet access at their home or business because of their location, and they are unable to get access at a suitable alternative location.

However, HMRC will not accept an application for exemption from MTD for ITSA if the only reason for the application is one of the following:

• the person previously filed a paper tax return;
• the person is unfamiliar with accounting software;
• the person only has a small number of records to create each year; or
• the person will spend extra time or incur additional costs as a result of complying with MTD for ITSA.

Where a person has an existing exemption from MTD for VAT because they are digitally excluded, providing that the person’s circumstances have not changed, HMRC will accept that they are also exempt from MTD for ITSA.

Applying for an exemption

To apply for an exemption from MTD for ITSA on the grounds of digital exclusion, a person will need to write to HMRC ahead of their MTD for ITSA start date. They must provide the following information:

• their National Insurance number;
• their name and address;
• details of how they currently submit their returns (including the use of an agent or other person to submit them on their behalf);
• the reason that they think that they are digitally excluded, including information in support of their claim;
• whether they have an accountant or agent and what they do for them; and
• any additional needs that they have.

An application can be made by an agent on behalf of someone who is digitally excluded.

It should be noted that if a person is unable to use digital returns themselves, for example because of age or disability, but they have an agent or someone else who can keep digital records and file digital returns on their behalf, an exemption will not be forthcoming.

The application should be sent to:

Self Assessment

HM Revenue and Customs

BX9 1AS

Where a person is already exempt from MTD for VAT because they are digitally excluded, they will also need to write to HMRC to apply for an exemption from MTD for ITSA, providing their National Insurance number, their VAT registration number and the reason that they are digitally excluded from submitting their VAT returns using software that is compatible with MTD for VAT.

An agent can apply for an exemption on a client’s behalf.

Other exemptions

The following are automatically exempt from MTD for ITSA and are unable to sign up voluntarily:

• those completing a tax return as a trustee, including a trustee of a charitable trust or a non-registered pension scheme;
• a person who does not have a National Insurance number on 31 January before the start of the tax year;
• a person completing a tax return as the personal representative of someone who has died;
• a Lloyd’s underwriters in respect of their underwriting activity; and
• a non-resident company.

Anyone in the above groups does not need to apply for an exemption as it is automatic.

The rate at which a company pays corporation tax depends on the level of its taxable profits. Where a company’s profits are below the lower profits limit, corporation tax is charged on all profits at the rate of 19% and where a company’s profits are more than the upper profits limit, they are all taxed at the rate of 25%. However, where the profit falls between these limits, corporation tax is charged at the rate of 25% and reduced by marginal relief. The effect of this is to provide a gradual increase in the rate of corporation tax from the small profits rate to the main rate.

For the financial years 2024 and 2025, the lower profits limit is £50,000 and the upper profits limit is £250,000. Where a company has one or more associated companies, these limits are divided by the number of associated companies plus one, so if a company has one associate, the limits are, respectively, £25,000 and £125,000. The limits are also proportionately reduced where the accounting period is less than 12 months.

Marginal relief is calculated by reference to the following formula:

F x (U – A) x N/A

Where:

F is the marginal relief fraction;

U is the upper profits limit;

A is the augmented profits for the accounting period; and

N is the total taxable profits for the accounting period.

The marginal relief fraction for the financial year 2025 is 3/200, unchanged from the financial year 2024.

Augmented profits are the company’s total taxable profits plus qualifying exempt distributions received by the company which are not excluded. Qualifying exempt distributions include dividends, distributions of assets, amounts treated as a distribution on the transfer of assets and liabilities and bonus issues following a repayment of share capital. Distributions are excluded from the calculation of augmented profits if they are from a 51% subsidiary, a company of which the recipient is a 51% subsidiary or a trading company or relevant holding company that is a quasi-subsidiary of the recipient.

If the company has no qualifying exempt distributions to take into account, augmented profits are the same as taxable profits and the formula can be simplified to F x (U – A).

To make things easier, HMRC have produced a tool which can be used to work out marginal relief. This can be found on the Gov.uk website at www.tax.service.gov.uk/marginal-relief-calculator.

Example

A Ltd prepares accounts to 31 March each year. For the year to 31 March 2025, it had taxable profits of £80,000. It does not receive any qualifying exempt distributions. Consequently, its augmented profits are also £80,000.

The company’s marginal relief is calculated as follows:

3/200 x (£250,000 – £80,000) x 1 = £2,550.

At the main rate, the company would pay corporation tax of £20,000 on its profits (£80,000 x 25%).

The company’s corporation tax bill is therefore £17,450, being corporation tax at the main rate of 25% (£20,000) as reduced by the marginal relief of £2,550.

The company’s effective rate of corporation tax is 21.81%.

A taxpayer may have grounds for appealing a penalty if they have a reasonable excuse for missing a filing or payment deadline. However, it is important to realise that the appeal will only succeed if HMRC accept that the excuse is indeed reasonable. In this regard, the bar is set high.

The first point to note is that there is no statutory definition of ‘reasonable excuse’. Whether a person has a reasonable excuse depends on the circumstances in which the failure to meet the obligation occurred, as well as the circumstances and the abilities of the person who failed to meet the obligation. Consequently, what might be a reasonable excuse for one person may not be a reasonable excuse for someone else.

HMRC’s approach

In determining whether an excuse is ‘reasonable’, HMRC’s approach is to look at what a reasonable person with the same attributes and abilities who wanted to comply with their tax obligations would have done in the same circumstances. A reasonable excuse is one that stops a taxpayer from meeting their obligations for a valid reason. In guidance published on the Gov.uk website, HMRC provide the following examples of reasons for a failure to comply which may be accepted as constituting a reasonable excuse:

• The taxpayer’s partner or a close relative died shortly before the tax return or payment deadline.
• The taxpayer had an unexpected stay in hospital which prevented them from dealing with their tax affairs.
• The taxpayer had a serious or life-threatening illness.
• The taxpayer’s computer or software failed while they were preparing their return online.
• The taxpayer experienced issues with HMRC’s online services.
• The taxpayer was prevented from completing their tax return because of a flood, a fire or a theft.
• The deadline was missed due to postal delays which the taxpayer could not have predicted.
• The delay related to a disability or a mental illness which the taxpayer has.
• The taxpayer was unaware of or misunderstood their legal obligations.
• The taxpayer relied on someone else to do their return and they failed to do so.

Where the taxpayer has a reasonable excuse for missing a filing deadline or making a payment, they should rectify this as soon as they are able.

Unacceptable excuses

Like ‘the dog ate my homework’, HMRC do not accept the following excuses as providing a valid reason for missing a filing deadline or failing to make a payment on time:

• A cheque or payment bouncing because the taxpayer did not have enough money in their account.
• Finding the HMRC system too difficult to use.
• Missing the deadline because a reminder was not received from HMRC.
• A mistake was made on the tax return.

The normal filing deadline for the 2024/25 Self Assessment tax return is 31 January 2026. However, if you have some tax to pay under Self Assessment and you also pay tax under PAYE, if you file your return by 30 December 2025, you may be able to pay what you owe through an adjustment to your tax code rather than through the Self Assessment system. This may be the case if, for example, you are employed or receive a pension and also have some income from self-employment or property or you have taxable investment income.

Conditions

Tax due under Self Assessment can only be collected through your tax code if the following conditions are met:

• the total amount that you owe through Self Assessment is £3,000 or less;
• you already pay tax through PAYE (for example, because you are employed or receive a company pension); and
• you filed a paper return by 31 October 2025 or an online return by 30 December 2025.

It should be noted that if the amount you owe is more than £3,000, you cannot make a part payment to reduce the outstanding amount to £3,000 or less and pay the balance through your tax code.

However, even if these conditions are met, you will not be able to pay your Self Assessment tax bill through your tax code if any of the following apply:

• you do not have sufficient PAYE income to collect the amount that is due;
• you would end up paying more than 50% of your income in tax; or
• you would end up paying over twice as much tax as you normally do.

How it works

If you have filed your return by the deadline and you are eligible to pay your tax bill through your tax code, HMRC will automatically adjust your tax code to collect the amount of tax that you owe, unless you indicate that you do not wish to pay your tax in this way. The adjustment will take the form of a deduction from your allowances. The amount of the deduction will depend on how much you owe and your marginal rate of tax. For example, if you pay tax at 40% and owe tax under Self Assessment of £1,000, your allowances will be reduced by £2,500 (40% of £2,500 = £1,000).

The adjustment will be made to your 2026/27 tax code. As a result of the adjustment, you will pay what you owe for 2024/25 in equal instalments throughout 2026/27 each time that you are paid. If you are paid monthly, you will effectively pay your bill in 12 monthly instalments.

Advantages and disadvantages

Paying tax through your tax code allows you to pay it later – instead of having to settle the bill by 31 January 2026, you pay it in equal instalments over the 2026/27 tax year. This provides a cashflow benefit and removes the need to find the funds to pay the bill in one hit.

Paying your bill through your tax code also provides an automatic interest-free instalment plan. Unlike a Time to Pay arrangement, you do not need to set it up, and there is no interest to pay either.

However, having your tax deducted from your pay will reduce your take-home pay, so it may not be for everyone.