As announced at the time of the 2025 Autumn Budget, the ordinary and upper dividend tax rates are increased by two percentage points from 6 April 2026. The additional dividend rate remains unchanged. The increase will affect those with investments in shares who receive dividend income and also shareholders in personal and family companies who extract profits by way of dividends.

All taxpayers, regardless of the rate at which they pay tax, receive a dividend allowance. This is set at £500 for 2026/27, unchanged from the previous year. The dividend allowance acts as a nil rate band, and dividends sheltered by the allowance are received free of tax. However, the allowance uses up part of the tax band in which it falls.

Where dividends are not sheltered by the dividend allowance, they are treated as the top slice of income and taxed at the dividend tax rates. The dividend ordinary rate applies to dividends falling within the basic rate band and is set at 10.75% for 2026/27 (up from 8.75% for 2025/26). Dividends falling in the higher rate band are taxed at the dividend upper rate which is set at 35.75% for 2026/27 (up from 33.75% for 2025/26). Where dividends fall in the additional rate band, they are taxed at the dividend additional rate, which remains at 39.35% for 2026/27.

The tax rises mean that taxpayers paying tax on their dividends at the ordinary or upper dividend rates will pay an additional £20 in tax for every £1,000 of dividend income in 2026/27.

Example

John is retired. He receives a pension of £20,000 each year. He has invested in shares over the years and receives dividends of £30,000 a year which boost his retirement income.

For 2026/27, he will pay tax of £3,171.25 on his dividend income. The first £500 of dividends is tax free, being sheltered by the dividend allowance of £500. The remaining £29,500 is taxed at the dividend ordinary rate of 10.75%. After tax, John retains £26,828.75.

In 2025/26, he also received dividend income of £30,000. However, his tax bill for that year was £2,581.25, leaving John with £27,418.75 after tax.

As a result of the rise in the dividend ordinary rate, John is £590 worse off in 2026/27 (£29,500 @ 2%).

Impact on profit extraction

For directors of personal and family companies, a popular profit extraction strategy is to take a salary equal to the personal allowance and to extract further profits as dividends. Where the dividends are taxed at the ordinary or upper dividend rates, the director/shareholder will pay more tax on those dividends than in 2025/26.

Example

Julia runs a personal company. She prepares accounts to 31 March each year. In the year to 31 March 2027, she expects to make a profit of £80,000 after tax, having taken a salary of £12,570 from the company. She extracts the profits as dividends. Apart from the salary from the company, she has no other income.

The first £500 of the dividends are sheltered by her dividend allowance. The dividend allowance uses up £500 of the basic rate band, leaving £37,200 available.

The first £37,200 of the remaining dividend falls in the basic rate band and is taxed at the dividend ordinary rate of 10.75% – a tax hit of £3,999.

The remaining £42,300 of the dividend falls in the higher rate band and is taxed at the dividend upper rate of 35.75% – a tax hit of £15,122.25.

Consequently, Julia pays tax of £19,121.25 on her dividend of £80,000, leaving her with £60,878.75.

Assuming she also took a dividend of £80,000 in 2025/26, she would have paid tax of £17,531.25, leaving her with £62,468.75. As a result of the increase in the ordinary and upper dividend tax rates, she is £1,590 worse off in 2026/27 (£79,500 @ 2%).

Taxpayers whose dividends are taxed at the dividend additional rate are unaffected by these changes.

When an employee works from home, they may incur additional costs as a result, such as higher gas and electricity bills. The tax system offers some help where the employer meets some or all of these additional costs. However, the relief that was previously available where employees met these costs themselves is withdrawn from 6 April 2026.

Expenses reimbursed by the employer

No tax liability arises where an employer makes a payment to an employee in respect of reasonable household expenses which the employee incurs while carrying out the duties of the employment at home under homeworking arrangements. These are arrangements between the employer and the employee under which the employee regularly performs some or all of the duties of the employment from home. For these purposes, household expenses are defined as expenses connected with the day-to-day running of the employee’s home. This includes the cost of heating and lighting the work area and the metered cost of extra water, additional insurance costs and the cost of business telephone calls. However, costs that are the same regardless of whether the employee works at home or not, such as rent, mortgage costs and council tax, do not count.

Although homeworking arrangements must be in place for the exemption to apply, there is no requirement for them to be in writing. Under those arrangements, the employee must work at home rather than at the employer’s premises. The exemption will also apply to hybrid arrangements where the employee works at home on certain days and at the employer’s premises on the remaining days.

However, the exemption does not apply where the employee works at home informally, for example, to accept a delivery, or where the employee takes work home in an evening or on a weekend.

To remove the administrative burden of working out the actual extra costs, employers can instead pay employees £6 per week tax free to cover their additional household expenses. The amount is the same regardless of whether an employee works at home one day a week or five days a week.

Employers can reimburse the actual additional household costs instead where these are higher as long as evidence can be provided to justify the amount paid.

Employee meets cost

Prior to 6 April 2026, where employees incurred additional household costs as a result of working from home and these were not reimbursed by the employer, they could claim tax relief for these additional costs. An administrative easement allowed them to claim a fixed deduction of £6 per week (an annual deduction of £312). Where the easement was used, it was not necessary to provide evidence in support of the deduction.

However, as announced at the time of the 2025 Autumn Budget, this relief is withdrawn from 6 April 2026. New legislation will prevent a deduction for work expenses where those expenses relate to the additional household costs incurred as a result of working from home.

The removal of the relief will increase the tax paid by affected employees by £62.40 for basic rate taxpayers, by £124.80 for higher rate taxpayers and by £140.40 for additional rate taxpayers.

Employees who are eligible for relief for 2025/26 can make a claim online or, where they complete a Self-Assessment tax return, in their return.

In personal and family companies, director shareholders often borrow money from the company. Where a company is close, as most personal and family companies are, if a loan to a director or other participator remains outstanding on the corporation tax due date for the period in which the loan was taken out, the company must pay tax on the outstanding amount of the loan. Corporation tax is due nine months and one day from the end of the accounting period.

The tax that is due on the outstanding loan balance is known as section 455 tax. While it is payable with the corporation tax for the period, it is not corporation tax. Unlike most taxes, it is a temporary tax as it is repayable nine months and one day after the end of the period in which the loan is repaid.

The rate of section 455 tax is linked to the dividend upper rate. This is set at 33.75% for 2025/26 and will rise to 35.75% for 2026/27.

Where a director is thinking of taking a loan from a company and is unlikely to repay it within nine months of the company year end, taking the loan in 2025/26 rather than in 2026/27 will reduce the section 455 tax paid by the company on the outstanding loan by 2%.

As the rate of section 455 tax paid on a loan depends on the dividend upper rate at the time the loan is made, when clearing loans, it makes sense to clear those that will generate the highest repayment first (i.e. those on which the rate of section 455 tax is the highest).

Example

A Ltd is Andrew’s personal company. The company prepares accounts to 30 June each year.

Andrew, the sole director shareholder is planning on taking a £30,000 loan from the company in April 2026. He is planning on repaying it in 2028 when a savings policy matures. The loan will remain outstanding on 1 April 2027 when the corporation tax for the period is due.

If Andrew takes the loan on 30 April 2026 as planned, the company will need to pay section 455 tax of £10,725 (£30,000 @ 35.75%) on 1 April 2027. However, if instead Andrew takes the loan a month earlier on 31 March 2026, the company’s section 455 tax bill will be £10,125 (£30,000 @ 33.75%). Taking the loan before 6 April 2026 saves the company £600. in tax.

As the tax year draws to a close, directors of personal and family companies should consider whether it is worthwhile paying a dividend before 6 April 2026. However, it is only possible to pay a dividend where the company has sufficient retained profits from which to pay it. Also, where a class of share has more than one shareholder, dividends must be paid in proportion to shareholdings.

Unused allowances

Where a shareholder has not used their dividend allowance (set at £500 for 2025/26) or their personal allowance in full, consideration should be given to paying a dividend before the end of the tax year to mop up unused dividend and personal allowances. This allows profits to be extracted from the company without an additional tax liability. Where the company has an alphabet share structure, dividends can be tailored to the shareholder’s circumstances.

Beat the dividend tax rise

Once the dividend and personal allowances have been used up, dividends are currently taxed at 8.75% where they fall in the basic rate band, at 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band. From 6 April 2026, the dividend ordinary rate is increased from 8.75% to 10.75% and the dividend upper rate is increased from 33.75% to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

Where dividends fall in the basic or higher rate band, an additional 2% will be payable in tax if the dividend is paid on or after 6 April 2026 compared to a dividend paid before that date. Where retained profits allow, consideration could be given to accelerating a dividend payment so that it is made before 6 April 2026 rather than on or after that date. This will save £20 in tax for every £1,000 paid as a dividend. However, if a dividend will be taxed at the ordinary dividend rate if paid in 2026/27 and at the upper dividend rate if paid in 2025/26, there is no point accelerating the dividend – 10.75% is a lot less than 33.75%.

State pension entitlement depends on a person having sufficient qualifying years, which in turn depends on them having paid or been treated as having paid sufficient National Insurance contributions. A person will receive the full single tier state pension (also known as the new state pension) if they have at least 35 qualifying years. Where a person has less than 35 qualifying years but at least ten, they will receive a reduced state pension. A person with less than ten qualifying years does not receive a state pension. Only the individual’s own qualifying years count – a person cannot qualify for the new state pension by virtue of contributions paid by their spouse or civil partner.

Employed earners

It is the payment of primary Class 1 National Insurance contributions which provides a qualifying year for employees. An employee will secure a qualifying year for state pension purposes if their earnings for that year are at least equal to the lower earnings limit for Class 1 National Insurance purposes. For 2025/26, this is £6,500. For 2026/27, it will rise to £6,708.

However, a person’s liability to pay Class 1 National Insurance only starts once their earnings exceed the primary threshold, which for 2025/26 and 2026/27 is £242 per week (£1,048 per month; £12,570 per year). Where an employee’s earnings are between the lower earnings limit and the primary threshold, they do not actually pay Class 1 contributions but are treated as if they have paid notional primary Class 1 contributions at a zero rate. This provides them with a qualifying year for zero contribution cost.

Self-employed earners

For 2024/25 and later tax years, self-employed earners secure a qualifying year through the payment of Class 4 National Insurance contributions. A self-employed earner is liable to pay Class 4 contributions for a year in which their profits exceed the lower profits limit, which for both 2025/26 and 2026/27 is set at £12,570. However, where a self-employed earner’s profits are between the small profits threshold (set at £6,845 for 2025/26 and £7,105 for 2026/27) and the lower profits limit, the self-employed earner receives a National Insurance credit which provides them with a qualifying year. Self-employed earners whose profits are below the small profits threshold can opt to pay voluntary Class 2 contributions, at a rate of £3.50 per week for 2025/26 and £3.65 per week for 2026/27.

For 2023/24 and earlier tax years, it was the payment of Class 2 National Insurance contributions which provided the self-employed earner with a qualifying year. Class 4 National Insurance had no associated benefit entitlement prior to 6 April 2024. A self-employed earner needed to pay 52 weeks of Class 2 contributions to earn a qualifying year. For 2022/23 and 2023/24, the liability arose where profits exceeded the lower profits threshold. However, where profits were between the small profits threshold and the lower profits threshold, the self-employed earner received a credit, providing them with a qualifying year. For 2021/22 and earlier years, self-employed earners whose profits exceeded the small profits threshold were liable for Class 2 contributions. Self-employed earners with profits below the small profits threshold could pay Class 2 contributions voluntarily to secure a qualifying year.

National Insurance credits

There are a number of circumstances in which an individual may receive a National Insurance credit which will provide them with a qualifying year. This is the case where a person receives or is entitled to receive child benefit or is in receipt of certain state benefits.

Voluntary contributions

A person can pay voluntary Class 3 or, if eligible, voluntary Class 2 National Insurance contributions to plug gaps in their contribution record. Where a person is eligible to pay voluntary Class 2 contributions, this is a much cheaper option.

Check your state pension forecast

A person should check their state pension forecast online to see how many qualifying years they have and whether they will have 35 qualifying years by the time they reach state pension age. Where a person will not qualify for a state pension, they can consider paying voluntary contributions to make up a shortfall. This will only be worthwhile if, after making the contributions, the individual will have at least ten qualifying years when they reach state pension age.

As the end of the 2025/26 tax year approaches, it is a good idea to undertake a financial review and assess whether there is any action you can take to cut your tax bill.

Tip 1 – Don’t waste your personal allowance

If you have not used your 2025/26 personal allowance, it will be lost – you cannot carry it forward to 2026/27. To prevent wasting it, consider whether you can advance income so that you receive it in 2025/26 rather than in 2026/27. If you are claiming capital allowances, consider tailoring your allowances so you do not waste your personal allowance. If you have a family company, consider paying a dividend to mop up your dividend allowance and any unused personal allowance.

If you cannot use your personal allowance and you are married or in a civil partnership and your spouse/civil partner pays tax at the basic rate, consider making a marriage allowance claim to transfer £1,260 of your allowance to them – this can cut your joint tax bill by £252.

Tip 2 – Reduce your income to protect your personal allowance

Once adjusted net income reaches £100,000, your personal allowance is reduced by £1 for every £2 by which your income exceeds this level. Once adjusted net income reaches £125,140, the personal allowance is lost. However, consideration could be given to making pension contributions or Gift Aid donations to charity to reduce your income and claw back some or all of your personal allowance.

Tip 3 – Invest in an ISA

If you have not already invested the full £20,000 in an ISA in 2025/26, consider using the full allowance before 6 April 2026. Interest and dividends within an ISA are tax-free.

From 6 April 2027, the tax rates on savings income will rise by two percentage points. From the same date, under 65s will only be able to invest £12,000 of their £20,000 ISA allowance in a cash ISA.

Tip 4 – Beat the dividend tax rise

From 6 April 2026, the dividend ordinary rate (which applies to dividends falling in the basic rate band) and the dividend upper rate (which applies to dividends falling in the higher rate band) increase by two percentage points. The dividend ordinary rate rises from 8.75% to 10.75% and the dividend upper rate rises from 33.75% to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

If you have a personal or family company which has retained profits, consider paying a dividend before 6 April 2026 to beat the dividend tax rises.

Tip 5 – Make pension contributions

Tax-relieved contributions can be made to a registered pension scheme up to 100% of earnings (or £3,600 if lower) subject to having sufficient available annual allowance. The annual allowance is set at £60,000 for 2025/26. However, where threshold income exceeds £200,000 and adjusted net income exceeds £260,000, it is reduced by £1 for every £2 by which adjusted net income is more than £260,000 until the allowance is reduced to £10,000. Unused allowances can be carried forward for up to three years. Any allowance from 2022/23 will be lost if not used by 5 April 2026; however, you must use up all your 2025/26 allowance before using allowances from earlier years.

Once a pension has been flexibly accessed, the annual allowance is reduced to £10,000.

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will apply from 6 April 2026 to sole traders and unincorporated landlords with combined trading and property income in 2024/25 of at least £50,000.

Under MTD for ITSA, traders and landlords must keep digital records and make digital returns to HMRC using MTD-compatible software.

A digital record is a record of income and expenses that is created and stored in software that works with MTD for ITSA. Under MTD for ITSA, a trader must keep digital records of their trading income and expenses, and an unincorporated landlord must keep digital records of their property income and expenses. If a trader or landlord has other income, there is no need for them to keep records of that income digitally.

Software

Traders and landlords within MTD for ITSA will need to use software that either creates digital records and submits information to HMRC or software which connects to the trader or landlord’s own record-keeping software, such as a spreadsheet. This type of software is known as bridging software.

Taxpayers can choose a single product that meets all their needs or a number of products that work together. Where more than one product is used, they must link digitally. For example, it is acceptable to keep records in a spreadsheet which is linked digitally to software to submit information to HMRC. However, it is not acceptable to manually enter or cut and paste data from a spreadsheet into a software package.

Records that must be kept digitally

The following records must be kept digitally:

• self-employment income, such as sales, takings and fees;
• self-employment expenses, such as the cost of goods, travel costs, office costs, rent, etc.;
• property income, such as rent, lease premiums, reverse premiums and inducements; and
• property expenses, such as repairs, maintenance, travel, etc.

The amount, the date the income was received or payment made and the nature of the income or expense should be recorded. The income and expenditure categories for MTD for ITSA are the same as for the Self-Assessment tax return.

If a trader has more than one business, they will need to keep the details for each business separately and make separate quarterly returns for each business. Landlords should keep separate records for their UK and foreign property businesses.

Jointly let properties

Where a landlord has income from a jointly let property, they only need to keep digital records relating to their share of the income and expenses. Landlords with income from jointly let properties can opt to keep less detailed records or to exclude income from jointly let properties in their quarterly updates; the income is instead included when the position for the tax year is finalised.

Turnover below the VAT threshold

If a trader’s turnover from a single self-employment is £90,000 or less, they only need to record whether a transaction is income or an expense. More detail is not required.

Landlords with income from residential letting need to record whether a transaction is an income or an expense and, where it is an expense, whether it is a restricted finance cost.

Once income reaches £90,000, transactions must be fully categorised.

Retailers

Retailers can create a digital record of gross daily takings rather than having to record each individual sale.

Storing digital records

Digital records must be kept for at least five years from the 31 January submission date for the tax year in question, i.e. for 2026/27, until 31 January 2033.

Employees often incur expenses in doing their job and they may be able to claim these back from their employer through the expenses system. Where an employer reimburses expenses, there may be tax implications to consider.

Exemption for paid and reimbursed expenses

A tax exemption applies to certain paid and reimbursed expenses. It is available if the expenses which are paid or reimbursed by the employer would be fully deductible from an employee’s earnings had the employee met the cost themselves.

Employees are allowed a deduction for expenses which are incurred wholly, exclusively and necessarily in the performance of the duties of the employment. The tax legislation also allows a deduction for a number of specific expenses, such as certain travel expenses and fees and subscriptions paid to bodies approved by HMRC.

As long as this test is met, the exemption applies regardless of whether the employer meets the cost at the outset or the employee pays initially and is reimbursed by the employer. For example, if an employee is required to attend a meeting at a client’s office, the employee would be able to deduct the associated travelling costs if they met them themselves. As this test is met, if the employer pays the cost, for example by purchasing a train ticket for the employee, or reimburses the employee’s travel costs, the exemption would apply and there would be no tax consequences in either case.

However, if the test is not met, and the employer paid or reimbursed the employee’s expenses, the amount paid or reimbursed would be taxable. An example of this would be where an employer reimbursed the cost of the employee’s home to work travel (which is not tax deductible).

Forthcoming changes

There are some anomalies in the tax legislation that mean no tax charge arises where the employer provides an employee with a benefit, but a tax charge will arise if the employee provides the same thing and is reimbursed by their employer. For example, an employer can provide an employee with an eye test and corrective appliances without triggering a tax charge, but if an employee books and pays for an eye test and is reimbursed by their employer, the amount reimbursed is taxable as the employee is not entitled to a deduction for the cost of an eye test.

To counter this, new exemptions are to be introduced which will level the playing field in respect of certain benefits, meaning that the tax outcome is the same regardless of whether the employer provides the benefit or reimburses the employee for the costs.

From 6 April 2026 exemptions will be introduced to ensure that where an employer pays for or reimburses an employee for the cost of eye tests, flu vaccines or homeworking equipment no tax charge will arise. This will align the tax position with that where these benefits are provided directly by the employer.

It is reasonable to assume that if a person pays too much tax, HMRC will automatically send the overpayment back to them. Unfortunately, this is not the case, and where a taxpayer is due a tax refund, they may need to claim it.

Why an overpayment may arise

There are various reasons why a person may pay more tax than they need to. For example, where a taxpayer is in Self-Assessment and makes payments on account, if their circumstances change and their income falls, they may have paid more than they need to. An employee may pay too much tax if they have been given the wrong tax code, or if they have only worked for part of the tax year and not had the benefit of their full personal allowance.

Determining if you have overpaid tax

There are various routes by which a tax overpayment can come to light. For example, taxpayers who do not complete a Self-Assessment tax return and have paid too much tax will receive either a P800 calculation or a Simple Assessment letter. These are normally sent out between June and March following the end of the tax year. The letter will tell them that they have paid too much tax and how to claim a refund. If the taxpayer is within Self-Assessment, they will not receive a letter. However, they may find out that they have overpaid tax when they complete their Self-Assessment tax return. However, if HMRC’s return software is used to complete the return, remember the tax calculation does not take into account any payments that have already been made, and when these are deducted from the amount that the taxpayer owes, it may become clear that the taxpayer has paid too much.

A taxpayer can also check whether they have paid too much by looking at their personal tax account online or via the HMRC app.

Claiming the refund

Where a taxpayer needs to claim a tax refund, there are various ways in which this can be done. A claim can be made online using the tool on the Gov.uk website at www.gov.uk/claim-tax-refund. A tax refund can also be claimed through the taxpayer’s personal tax account or via the HMRC app. The refund will normally be made within five days of making the claim online.

If the tax calculation letter tells the taxpayer that they will receive a cheque, they do not need to claim a refund. The cheque will normally be sent within 14 days of the date on the letter.

Where the taxpayer is within Self-Assessment, HMRC may not issue a tax refund if a tax payment, for example, a payment on account, is due within 45 days. Instead, they will set the refund against the next tax bill.

Interest is paid on overpaid tax at a rate of 1% below the Bank of England base rate, subject to a minimum level of 0.5%.

The 2025/26 tax year comes to an end on 5 April 2026. If you are thinking of selling assets that may realise a gain and have yet to use your 2025/26 capital gains tax annual exempt amount, it may be worth making the disposal before the end of the current tax year.

All individuals have an annual exempt amount for capital gains tax purposes. Net gains for the year (after the deduction of allowable losses for the tax year) are free of capital gains tax where they are sheltered by the annual exempt amount. For 2025/26, it is set at £3,000 and is worth £540 to a basic rate taxpayer and £720 to a higher rate taxpayer.

If the annual exempt amount is not used in the tax year, it is lost.

Example

Ben is thinking of selling two lots of shares, one that will realise an expected gain of £4,000 and one that will realise an expected gain of £5,000. He is having a new kitchen in June 2026 and needs to sell the shares to finance the project.

Ben is a higher rate taxpayer. He has not used his annual exempt amount for 2025/26.

If Ben waits until May to sell the shares, he will realise a gain of £9,000 in the 2026/27 tax year. Setting his 2026/27 annual exempt amount of £3,000 against the gain reduces the chargeable gain to £6,000 on which he will pay capital gains tax at 24%, giving rise to a tax bill of £1,440.

However, if Ben sells one lot of shares before 6 April 2026 realising a gain of £4,000 against which he can set his annual exempt amount for 2025/26 of £3,000, this will reduce the chargeable gain to £1,000 on which he will pay capital gains tax of £240.

If he sells the remaining shares after 5 April 2026, he will be able to set his 2026/27 annual exempt amount of £3,000 against the gain of £5,000, reducing his chargeable gain to £2,000 on which he pays tax of £480.

By selling some of the shares in 2025/26 rather than in 2026/27 and using his annual exempt amount for 2025/26 which would otherwise have been wasted, Ben is able to reduce the capital gains tax payable on the disposal of his shares by £720 from £1,440 to £720.

Spouses and civil partners

Spouses and civil partners can take advantage of the special rules that allow them to transfer assets or a share in an asset between them at a value that gives rise to neither a gain nor a loss. This can prevent wasting one spouse or civil partner’s annual exempt amount.

Example

Julie is planning on selling some shares in March 2026 which would give rise to a gain of £7,000. She has not used her annual exempt amount for 2025/26, nor has her wife Jane. Jane is not planning on making any disposals in 2025/26.

If Julie simply sells her shares, she will realise a gain of £7,000, of which £3,000 will be sheltered by her annual exempt amount. If Julie is a basic rate taxpayer, she will pay tax of £720 on the chargeable gain of £4,000 (£4,000 @ 18%).

However, if she transfers 3/7^th of her shares to Jane which Jane then sells in March 2026 the resulting gain of £3,000 will be covered by her annual exempt amount and no capital gains tax will be payable. Following the transfer, Julie will realise a gain of £4,000 of which £3,000 is covered by her annual exempt amount, reducing her chargeable gain to £180. By making use of Jane’s annual exempt amount, the couple save tax of £540.