The tax season for 2025/26 has kicked off, and we have already begun to prepare and file tax returns for clients.
We are now in our sixth year in Dartmouth, after moving down from Reigate in June 2020, at the end of the first Covid lockdown. We have taken on more clients locally in Dartmouth and in the South Hams of Devon, but we still have clients all over the country.
Last Autumn we took on Georgia Langdon-Gulley as a full-time employee. Georgia is a qualified accountant with many years experience working for a firm in the south-west, and she has grown up and still lives in south Devon. With Georgia on board, we were able to cope with our largest number of Self-Assessment tax submissions, and hopefully we are ready to take on the new Making Tax Digital for Income Tax quarterly reporting requirements.
The main purpose of this note is to let you know that we are ready to begin work on your 2025-26 tax return, which we hope will act as a prompt to get your papers ready sooner rather than later.
I will also highlight some topics of interest – the introduction of Making Tax Digital for Income Tax from April 2026, the impact of recent Companies House changes, how HMRC are being more proactive in taxing Bank Interest, higher rates of tax on dividends, interest and rental income from 2026/27 …
I make this point every year but it remains a limitation to so much tax planning. Income Tax rates and thresholds remain unchanged, which means that every year more people are pulled into paying higher rates of tax, and are falling foul of cliff edge thresholds – I cover this in more detail in Section 4.
- Planning for your 2025-26 Tax return
We have been preparing checklists for clients for the preparation of papers for the 2025-26 tax return.
The 2024/25 tax return saw changes introduced, by the then recently elected Starmer government, with the most radical changes being to Capital Gains Tax. The tax rates and thresholds for 2025/26 remain largely unchanged, but I will remind you of those basics…
The tax-free Personal Allowance remains at £12,570, after which income is taxed at the basic rate of 20% up to £50,270. The Higher Rate tax of 40% applies up to £125,140, after which income is taxed at 45%. The Personal Allowance begins to be lost at £100,000, until it is all lost once taxable income reaches £125,140. Between £100,000 and £125,140 the marginal rate of tax on income is either 60% or 53.75%.
The tax-free Dividend Allowance remains at just £500. Basic rate taxpayers get a £1,000 tax-free allowance on Interest, which is lowered to £500 for Higher Rate taxpayers. Basic rate taxpayers with savings income can also benefit from the Starting Rate for Savings which effectively adds another £5,000 of tax-free income to the Personal Allowance.
The threshold at which Capital Gains remains at £3,000 in 2024/25. In addition to that, the higher rate of capital gains tax on all gains is 24%, while gains for basic rate taxpayers are taxed at 18%.
The Trading Allowance, for sales from trades or ‘side hustles’, remains at £1,000, so that any income below that threshold does not need to be reported to HMRC. In March 2025, it was announced that the Trading Allowance would be raised to £3,000, but with no set date for that change.
A similar Property Allowance of £1,000 is in place, which means that where expenses from Property are less than £1,000, a taxpayer can adjust the actual expenses up to the £1,000 allowance threshold.
- Making Tax Digital for Income Tax ‘ITSA’
I have been writing about Making Tax Digital for Income Tax for many years. And finally it is here!
People do seem to be aware that change is on the way – there has been a lot of publicity, enough to gain traction with the general public. Those in scope for the first year of quarterly reporting should have been notified by HMRC, and have definitely been notified by us!
The table below shows how taxpayers will be brought into the Making Tax Digital reporting regime:
| Tax Year | Start of new reporting | Qualifying Income Threshold | Source | First Quarterly Reporting deadline |
| 2026-27 | 6th April 2026 | £50,000 | In 2024/25 Return | 7th August 2026 |
| 2027-28 | 6th April 2027 | £30,000 | In 2025/26 Return | 7th August 2027 |
| 2028-29 | 6th April 2028 | £20,000 | In 2026/27 Return | 7th August 2028 |
There are two boxes from the 2024/25 tax return – Self-Employment turnover and the Rental Income from the property schedule – that have been used in the £50,000 calculation. I would note two things:
It is turnover and net income that are used, rather than net profit, so a loss-making sole trader can still find themselves in scope if turnover is above £50,000;
Where a taxpayer has combined Self-Employment turnover of £40,000 and property income of £12,000, totalling £52,000, that brings them into scope.
How Quarterly Digital Reporting will work
For those in scope you will be required to file quarterly reports for property income and Self-Employment in a digital format within five weeks of the end of each quarter. Each quarter will be a year-to-date submission, so taxpayers can self correct during the year. A final year end return will still be required, to add all the other elements of the tax return (Employment / Pensions income; bank interest, dividends etc).
There will obviously be teething problems, but if book-keeping is kept up to date, the filing requirements should not be too burdensome, we hope.
Why are HMRC doing this?
At this point, HMRC are not collecting tax on a quarterly basis, which might lead to the question of why they are introducing quarterly reporting. The official explanation is that HMRC believe that digital reporting will reduce the scope for unrecorded or cash transactions, which should close what HMRC refer to as a “tax gap” of tens of billions of pounds.
Unofficially, another driver for change is that the HMRC IT infrastructure is old and limited in scope. In simple terms there are two systems, one linked to PAYE, and the other linked to Self-Assessment, and they don’t join up very well. The solution, again in overly simple terms, is to create a single system, which is what is happening. Over time, that new infrastructure will be able to add additional information on top of PAYE income, property income and Self-Employment income, needed to populate a tax return. But that is years away.
- Companies House changes
November 2025 saw a fundamental change introduced by Companies House – director verification for all directors of limited companies. For any of you with limited companies you will know that this has been a hassle, but in most cases we have got there in terms of compliance.
Companies House (and HMRC) set up a new process for Digital ID Verification – the GOV.UK ONE login, also available as an App, where Limited Company Directors will be able to verify documents, such as Driving Licences and Passports with a biometric chip. The Gov.uk One login is also being used by HMRC for registration for new taxes (such as PAYE, VAT).
It had been too easy to set up a limited Company, which opened up opportunities for fraud. Director verification is designed to clean things up, even if there is a feel that it is shutting the stable door after the horse has bolted. We wait to see how non-compliance is to be policed for directors who cannot verify themselves. At the moment, it feels like the burden has been on those who will comply.
The communication of the changes was noisy but not always clear, and the additional reporting requirements for “Persons of Significant Control” (PSC’s) came as a surprise. Severa clients have asked us “haven’t we done this already”?
A PSC is someone who exercises some degree of control over a Company, either via shareholding, voting rights at board meetings, or another indirect influence. For most small companies, the directors are shareholders and therefore also PSC’s, so the reporting appears duplicative. As with so much of Companies House reporting, it is the exceptions that they are looking for. Please bear with us as we look to close this issue out.
- Tax changes for 2026-27 and Beyond
2% Increases in Tax Rates on Property, Savings and Dividend income
There was a lot of noise ahead of the November 2025 Autumn statement, with rumours of tax increases across the board. In the end the only tax increases announced were 2% increases on property, savings and dividend income.
The basic rate of tax for property income, and for savings income above the tax-free thresholds, will be 22%. Higher rates will be 42%.
The basic rate of tax on dividends, above the tax-free threshold of £500, will rise by 2% to 10.75%, and higher rates to 35.75%. The highest rate of dividend tax on income above £125,140 remains unchanged at 39.35%
That will mean that taxpayers pay different rates of tax on different sources of income, as the basic rates now differ.
At this point, it is worth remembering that there are several points at which personal tax increases significantly and the thresholds for those increases have remained unchanged for several years. This phenomenon, known as ‘fiscal drag’ has the effect of bringing more taxpayers into higher rate brackets.
In England and Wales, those points are:
- £50,270, at which point higher rates of tax are applied
- Between £100,000 and £125,140, where £1 of the Personal Allowance of £12,570 is lost for every £2 of income;
- Above £125,140, where the highest rate of tax of 45% is applied
Paying the higher rates of tax at these points can be mitigated in two ways:
- Charitable Donations
- Personal Pension Contributions, up to the Annual Allowance
These donations and/or contributions raise those points and mean that the basic rate tax threshold is widened. What is more, the donations and/or contributions are grossed up by the basic rate of tax, meaning that a £100 charitable donation extends the basic rate threshold by £125 meaning that £125 of income is taxed at 20% less that it would have been, saving £20. The tax savings are even greater between £100,000 and £125,140.
The Scottish Government have been allowed to set their own income tax rates and thresholds, and there are small differences. However, the ‘cliff edge’ points remain.
Qualifying year for the State Pension and the Personal Tax Account
There is a minimum level of earnings to meet the annual qualification for the State pension, known as the Lower Earnings Limit, which is set at £6,708 for 2026/27. Alternately you can make voluntary (Class 3) NI contributions of £18.40 per week.
The best way to monitor qualification for the State pension is the HMRC Personal Tax Account, which can be accessed via the HMRC App. The Personal Tax Account enables users to view up to date employment data, PAYE Coding Notices and details of qualifying years for the State pension.
- HMRC and Bank Interest
Last year I noted that HMRC have been sent details of bank interest, and have been chasing taxpayers for additional tax. It seems that the quality and breadth of that interest reporting is improving.
HMRC are collecting that additional tax in two ways. One is via adjustment to PAYE Coding, where more tax is deducted at source from taxpayers. The second way is to ask the taxpayer to pay the tax via Self-Assessment. We are even seeing that HMRC are setting up Unique Tax References for taxpayers to use
Often taxpayers, who are not in the Self-Assessment regime, will get a “P800 letter” showing the interest received as well as other taxable income, and then showing the additional tax due on the bank interest. HMRC then request either direct payment of the tax due, or collect the tax indirectly via adjustments to PAYE Coding.
Although from an HMRC perspective they are able to collect more tax, there are disadvantages for users. Firstly, PAYE coding adjustments are not transparent and are often difficult to understand. Secondly those adjustments are based on the previous year’s interest figures, and can therefore be incorrect.
- HMRC Interest Rates on Late Payments and Prepaid or Overpaid Tax
From April 5th, 2025, HMRC changed the basis on which they charge interest rates on late payments of tax. Previously, the rate used was the prevailing base rate +2.5%. It is now the base rate +4%, which (at the time of writing) is a rate of 7.75%.
It is worth noting that HMRC do have a credit interest rate on overpaid or prepaid tax. For example, for companies paying Corporation Tax within 9 months of the company year end, will get an interest credit.
- Key Tax Rates and Thresholds for 2025-26 and 2026-27
In these tables we are publishing some key tax rates for both 2025-26 and 2026-27. The 2025-26 rates will be relevant for the next Self-Assessment Tax Returns due for submission by 31 January 2027. The 2026-27 rates will be relevant for any income and expense you have from 6 April 2026 onwards.
Frozen until 2026
| 2025-26 | 2026-27 | Notes | |
| Upcoming Tax Return | Upcoming tax year | ||
| INCOME TAX & SAVINGS | |||
| Personal Allowance | £12,570 | £12,570 | Up to £100,000 |
| 20% Basic Rate Upper Limit Highest Rate threshold | £50,270 £125,140 | £50,270 £125,140 | See ** below |
| Employment & Pensions Tax | Basic Rate: 20% Higher Rate: 40% Highest rate: 45% | Basic Rate: 20% Higher Rate: 40% Highest rate: 45% | State Pension remains free of tax |
| Rental & Property Income | Basic Rate: 20% Higher Rate: 40% Highest rate: 45% | Basic Rate: 22% Higher Rate: 42% Highest rate: 45% | |
| Dividend Tax Rates | Unused Personal Allowance can increase the 0% band for Dividends | ||
| First £500: 0% Basic Rate: 8.75% Higher Rate: 33.75% Highest Rate: 39.35% | First £500: 0% Basic Rate: 10.75% Higher Rate: 35.75% Highest Rate: 39.35% | ||
| Personal Savings Allowance | Rates applicable to both years | ||
| (‘PSA’) | £1,000 of interest tax free for Basic rate taxpayers £500 for Higher Rate taxpayers | ||
| Nil Rate for Savings | £5,000 | £5,000 | |
| ISA Allowance (per person) Junior ISA | £20,000 £9,000 | £20,000 +£5,000 UK £9,000 | (Lifetime ISA is £4,000 in both years) |
| PROPERTY | |||
| Stamp Duty | Rates applicable to both years | ||
| 0-£125k – Nil | £925k – £1.5m – 10% | With +5% for second | |
| £125k – £250k: 2%* | Over £1.5m – 12% | homes / investment | |
| £250k – £925k – 5% | *0% band is £300k for first time buyers | properties | |
| Rent-a-Room | £7,500 | £7,500 | |
| COMPANIES AND EMPLOYERS | |||
| Employment Allowance on Employers NI | £10,500 | £10,500 | per Company |
| Standard PAYE code | 1257L | 1257L | |
| NI thresholds: Class 1 EmployeeClass 1 Employer | 8% 15% | 8% 15% | Threshold basis £1,048-£4,189 per month £758-£4,189 per month |
| National Living Wage | £12.21 per hour | £12.71 per hour | if 21 or over |
| Workplace pension threshold | £6,240 | £6,240 | |
| Corporation Tax Rate | 19% to 25% | 19% to 25% | |
| VAT | |||
| VAT Threshold for registration | Over £90,000 | Over £90,000 | De-registration: below £88,000 |
| Flat Rate Scheme (based on turnover) | Register if turnover is below £150,000 | Up to £230,000 turnover | |
| CAPITAL GAINS TAX | |||
| Annual Allowance | £3,000 £1,500 for Trusts | £3,000 £1,500 for Trusts | |
| CGT Rates | 24%** higher rate 18%** basic rate | 24%** higher rate 18%** basic rate | |
| INHERITANCE TAX | |||
| IHT Rate | 40% | 40% | |
| Nil Rate Band | £325,000 | £325,000 | |
| Residence Nil Rate Band | £175,000 | £175,000 | |
| PENSIONS | |||
| STATE PENSION | |||
| ‘Old’ Basic State Pension New State Pension | £176.45 per week £230.25 per week | £184.90 per week £241.30 per week | (maximum pensions based on years of contribution) |
| PERSONAL PENSIONS | Note that the maximum tax-free pension drawdown remains at £268,275. | ||
| Annual Allowance | £60,000 | £60,000 | |
| Lifetime Allowance | Not applicable | Not applicable | |
** Income Tax rates are slightly different in Scotland and Wales now.
