UK small business owners are dealing with a tax landscape that is becoming more digital, more payroll-led and more important to plan for well ahead of the year-end. The most immediate change is already live: Making Tax Digital for Income Tax has begun for many sole traders and landlords, with the first quarterly update due on 7 August 2026. But that is only one part of the picture. Dividend tax has risen, business asset disposal has become more expensive, business property relief has changed for succession planning, and business-rate rules have been reshaped in England.
The practical lesson is simple: tax administration can no longer be left to a January rush or a once-a-year conversation with an accountant. Owners need timely bookkeeping, a clearer plan for drawings and payroll, and a review of investment, property and exit decisions. Here are the developments SMEHype readers should put at the top of their list.
1. Making Tax Digital for Income Tax is now a live obligation
Making Tax Digital for Income Tax, often shortened to MTD for Income Tax, started on 6 April 2026. It applies to individuals who are registered for Self Assessment, receive income from self-employment, property or both, and had qualifying income of more than £50,000 in the 2024/25 tax year. Qualifying income is broadly the gross income from those sources, not profit after expenses.
HMRC’s rollout is phased. The threshold falls to more than £30,000 for the 2025/26 tax year, bringing people into MTD from 6 April 2027, and then to more than £20,000 for the 2026/27 tax year, bringing them in from 6 April 2028. Partnerships are not yet included in the mandatory timetable. The official HMRC MTD eligibility guidance is the best starting point for checking whether the rules apply.
The first deadline is close
For businesses using standard update periods, the first quarterly update covers the opening three months of the 2026/27 tax year and is due by 7 August 2026. Further standard deadlines are 7 November, 7 February and 7 May. These updates are not tax returns and they do not create four tax payments a year. They are quarterly summaries of income and expenses drawn from digital records. The annual tax return and payment deadline remains 31 January following the end of the tax year.
HMRC has confirmed that no late-submission penalty points will apply for missed quarterly updates in the first mandatory year, 2026/27. That should not be treated as permission to delay. All quarterly updates must ultimately be filed before the annual return can be submitted, while late annual returns and late payments can still attract penalties and interest. From 2027/28, missed quarterly update deadlines can generate penalty points; four points lead to a £200 penalty, with a further £200 penalty for each subsequent missed deadline. Read HMRC’s MTD penalties guidance for the current rules.
What owners should do now
- Confirm the threshold correctly. Add gross self-employment and property income shown on the relevant Self Assessment return. Do not use turnover after deducting costs.
- Choose compatible software. A spreadsheet alone will not meet the full MTD requirement unless it is connected through compatible bridging software. Check whether your accounting package, bank-accounting tool or accountant’s system can create digital records and send updates.
- Build bookkeeping into the weekly routine. Capture sales, bills, receipts and mileage as they happen. The quarterly submission should be a review exercise, not a reconstruction project.
- Keep business and personal money separate. A dedicated business bank account makes the digital record cleaner and makes it easier to identify drawings, reimbursements and genuine business costs.
- Agree responsibilities with your accountant. Decide who maintains records, who checks categorisation, who sends the quarterly update and who completes the year-end tax return.
A consultant with £65,000 of gross trading income and £20,000 of allowable expenses is in scope because qualifying income is £65,000, not the £45,000 profit. A landlord with £35,000 of rents and a side business with £18,000 of sales is also over the £50,000 combined qualifying-income threshold. These are the kinds of cases where an owner can be caught out if they look only at profit.
2. Payroll costs remain a major planning issue
For employers, the 2026/27 tax year has retained the employer National Insurance structure introduced in 2025. Employers generally pay Class 1 National Insurance at 15% on employee earnings above the secondary threshold, which is £96 a week. This means payroll cost should be reviewed before a recruitment decision, annual pay rise or director salary change is finalised.
Eligible employers can still offset up to £10,500 of employer National Insurance through Employment Allowance in 2026/27. For a small business with several employees, that relief can materially reduce the annual cost of employment. It is claimed through payroll, but eligibility rules apply, so it should be actively checked rather than assumed. HMRC’s current rates and thresholds are set out in its National Insurance contribution tables.
For example, before Employment Allowance, an employee paid £30,000 a year creates employer National Insurance of roughly £3,750 using the £5,000 annual secondary threshold and 15% rate. A business with unused Employment Allowance may be able to absorb that cost within the relief; a business that has exhausted it needs to budget for the full amount. The point is not that a particular salary is right for every owner, but that salary decisions must be modelled with employer NIC, pension contributions and the wider reward package included.
Dividend tax has increased for owner-managed companies
From 6 April 2026, the ordinary dividend rate rose from 8.75% to 10.75%, and the upper dividend rate rose from 33.75% to 35.75%. The additional rate remains 39.35%. The dividend allowance remains £500. These rates affect dividends received above the allowance and after considering the shareholder’s other taxable income.
This matters particularly to directors who use a mix of salary and dividends. A higher dividend tax bill does not automatically mean a business should simply pay more salary. Salary is deductible for Corporation Tax but usually brings PAYE and National Insurance consequences; dividends are paid from post-Corporation Tax profits and must be supported by sufficient distributable reserves. The right mix depends on profit, other income, pension objectives, family shareholdings, cash needs and Employment Allowance eligibility. The government’s 2026/27 rates and allowances confirms the current dividend rates.
Use this change as a trigger for a proper drawings review. Ensure dividends are documented with board minutes and vouchers, avoid treating the company account as a personal bank account, and discuss any overdrawn director’s loan account early. The cost of correcting poor records after the year-end is usually higher than the cost of maintaining them properly throughout the year.
Prepare for benefits to move into payroll
There is also a payroll change on the horizon. Mandatory payrolling of benefits in kind will be introduced in phases from April 2027. For 2027/28, it will apply to company cars, car fuel, vans, van fuel and medical benefits; most other benefits are scheduled to follow from April 2028. Employers should use 2026/27 to check whether their payroll software can handle benefit values and whether their benefits data is reliable. HMRC’s recent Agent Update explains the phased approach.
3. Capital allowances: faster relief in some cases, slower relief in others
Small businesses buying equipment should not assume that every purchase gets immediate tax relief. The £1 million Annual Investment Allowance remains available, and companies can still access full expensing on qualifying new main-rate plant and machinery. However, a significant change has affected expenditure that falls outside those routes.
A new permanent 40% first-year allowance is available for qualifying main-rate expenditure incurred from 1 January 2026. It is designed to help where full expensing or the Annual Investment Allowance is unavailable or not preferred, including for some unincorporated businesses and assets bought for leasing. The relief does not apply to second-hand assets or cars.
At the same time, the main-rate writing-down allowance has been reduced from 18% to 14%: from 1 April 2026 for Corporation Tax businesses and 6 April 2026 for Income Tax businesses. The new 40% allowance may accelerate relief for qualifying purchases, but businesses relying on writing-down allowances will receive deductions more slowly. HMRC’s capital allowances policy paper sets out the scope and start dates.
In practical terms, create a short investment schedule before signing a finance agreement or ordering equipment. Record whether the asset is new or second-hand, whether it is plant and machinery, whether it will be leased out, and whether the business has already used Annual Investment Allowance. That information gives an adviser what they need to compare the available claims. Do not buy an asset purely for tax relief: the commercial need, financing cost and cash-flow impact should come first.
4. Selling, passing on or protecting a business now needs earlier planning
Business Asset Disposal Relief is more expensive
Business Asset Disposal Relief can reduce Capital Gains Tax when an owner sells all or part of a qualifying business or qualifying shares. From 6 April 2026, the relief rate is 18%, up from 14% in 2025/26. The lifetime limit remains £1 million of qualifying gains. For a £1 million qualifying gain, the difference between the old 14% rate and the current 18% rate is £40,000 of Capital Gains Tax.
Eligibility remains crucial. For a disposal of shares, the owner generally needs to have held at least 5% of the ordinary share capital and voting rights, and to have been an officer or employee of the company, for at least two years before disposal. Rules differ for sole traders, partnerships and some reorganisations. Do not assume that a buyer’s timetable, an earn-out, a share issue or a move away from active involvement will leave the relief intact. Review the official Business Asset Disposal Relief conditions before heads of terms are signed.
Business Relief for Inheritance Tax has changed
Since 6 April 2026, 100% Inheritance Tax Business Relief is capped at £2.5 million for the combined value of qualifying agricultural and business property. The excess can generally receive relief at 50%, rather than 100%. An unused allowance can be transferred between spouses or civil partners, potentially allowing up to £5 million of qualifying property to receive 100% relief in the right circumstances.
This is relevant to family companies, trading partnerships and business owners who expected qualifying private-company shares to pass free of Inheritance Tax. It is also important that gifts made on or after 30 October 2024 can affect the allowance where they fall within the relevant seven-year period. HMRC’s Business Relief guidance explains the new £2.5 million cap and qualifying property.
Owners with businesses approaching or exceeding that value should arrange a succession-planning review. This is not just an Inheritance Tax exercise. It should cover an up-to-date will, shareholder agreements, powers of attorney, business valuation methodology, insurance for tax liabilities and whether the business holds surplus cash or investment assets that could affect relief. Personal legal and tax advice is essential because the facts and ownership structure make a substantial difference.
5. Check VAT and business rates before they become cash-flow problems
The VAT registration threshold remains £90,000 of taxable turnover. Businesses must monitor rolling 12-month taxable turnover, not simply annual sales based on their accounting year. They may also need to register if they expect taxable turnover to exceed the threshold in the next 30 days alone. The current threshold is confirmed in HMRC’s VAT registration notice.
For a growing service business, a large contract can change the VAT position quickly. Build a monthly turnover forecast that identifies taxable sales separately from exempt or outside-scope income. If registration is near, decide in advance whether prices can be increased, whether contracts permit VAT to be added, and whether the business can recover input VAT on costs. Late registration can create an unexpected liability that has to be funded from margin already spent.
Businesses occupying premises in England should also review their 2026/27 business-rates bill. From 1 April 2026, the temporary Retail, Hospitality and Leisure relief has been replaced by permanently lower multipliers for qualifying properties with rateable values below £500,000. The small Retail, Hospitality and Leisure multiplier is 38.2p, while the standard Retail, Hospitality and Leisure multiplier is 43p. The 2026 revaluation can still increase or decrease a specific bill because the rateable value of the property has changed.
Check the rateable value, property description, multiplier and any relief shown on the local authority bill. If the business has lost small-business or sector relief because of revaluation, Supporting Small Business Relief may limit the increase for eligible ratepayers. The reforms apply to England, so businesses in Scotland, Wales and Northern Ireland should check the relevant devolved administration’s rules. The government’s business-rates multiplier guidance explains the new system.
Turn the changes into a 30-day tax action plan
- For sole traders and landlords: check MTD status, activate compatible software, reconcile records and submit the first quarterly update by 7 August 2026 if required.
- For limited companies: revisit the salary, dividend and pension strategy before the next dividend is declared.
- For employers: verify Employment Allowance eligibility, cost planned pay increases including employer NIC, and begin preparing benefits data for mandatory payrolling.
- For investors: identify planned capital purchases and establish which capital allowance route applies before committing.
- For owners considering an exit or succession: obtain advice on Business Asset Disposal Relief, Business Relief, valuations and the timing of any share transfer or sale.
- For premises-based businesses: check the business-rates bill and keep a rolling VAT-turnover forecast.
Conclusion: make tax planning part of business management
The most important tax development for many SMEHype readers is MTD for Income Tax, but the wider message is bigger. The 2026 changes affect how quickly records need to be kept, how owners take money from their companies, how investment relief is claimed and how a future sale or family succession should be structured. Take action now: review your records, book a focused discussion with your accountant or tax adviser, and convert these rule changes into a practical cash-flow and compliance plan for the rest of 2026/27.
