Key UK Tax Changes for 2026/27: What Small Businesses and Sole Traders Need to Know
With the 2026/27 tax year now underway, many small business owners and sole traders face new compliance demands and higher costs in key areas. A major shift is the phased rollout of Making Tax Digital for Income Tax, which begins affecting those with qualifying income over £50,000 from 6 April 2026.
“Staying ahead of tax changes is essential for maintaining compliance and protecting your hard earned profits.”
Key Areas We Will Cover:
- Making Tax Digital for Income Tax requirements
- Updates to dividend tax rates
- Changes to capital gains tax and Business Asset Disposal Relief
- Capital allowances adjustments for businesses
- National Insurance and income tax thresholds
- Business rates and other practical impacts
- Action steps and how professional support can help
Introduction:
The 2026/27 tax year introduces several important updates that small businesses, sole traders, and self employed individuals across London and the UK must understand. As experienced Chartered Accountants, at Kay Peters & Co we help clients navigate these changes with clear, practical advice tailored to their circumstances. Whether you run a startup, an established trade, or manage rental income alongside your business, knowing what is changing can help you remain compliant, minimise liabilities where possible, and focus on growth.
Making Tax Digital for Income Tax: A Major Compliance Shift
From 6 April 2026, Making Tax Digital (MTD) for Income Tax becomes mandatory for sole traders and landlords with qualifying gross income (trading and/or property) over £50,000, based on the 2024/25 tax return. This requires compatible software for digital record keeping and quarterly updates to HMRC, plus an end of year finalisation.
The threshold will lower in future years: over £30,000 from April 2027 and over £20,000 from April 2028. A soft landing period applies in the first year with no penalties for late quarterly submissions. Exemptions exist for certain groups, but most small businesses above the threshold will need to prepare.
Practical implications for sole traders:
- Switch to MTD compatible bookkeeping software early.
- Maintain accurate digital records throughout the year.
- Budget for potential software and time costs.
Dividend Tax Rate Increases
For those extracting profits via dividends (common for company directors who may also be sole traders considering incorporation), the rates rise from 6 April 2026:
- Basic rate: 8.75 per cent to 10.75 per cent
- Higher rate: 33.75 per cent to 35.75 per cent
- Additional rate remains at 39.35 per cent.
This change affects tax efficient profit extraction strategies. Reviewing your remuneration mix with a Chartered Accountant is advisable.
Capital Gains Tax and Business Asset Disposal Relief
The rate for Business Asset Disposal Relief (BADR, formerly Entrepreneurs’ Relief) increases to 18 per cent for disposals on or after 6 April 2026 (from 14 per cent). This applies to qualifying business sales by sole traders or partners.
The annual exempt amount for Capital Gains Tax remains at £3,000 for 2026/27. Planning the timing of any business disposals or asset sales can make a significant difference.
Capital Allowances Updates
The main rate writing down allowance for plant and machinery reduces from 18 per cent to 14 per cent for unincorporated businesses from 6 April 2026. A new 40 per cent first year allowance is introduced for certain main rate assets from 1 January 2026, offering accelerated relief for eligible investments.
Businesses with significant capital expenditure should review timing and eligibility to maximise relief.
Income Tax, National Insurance, and Frozen Thresholds
The personal allowance stays at £12,570, with the basic rate limit at £37,700 (higher rate threshold £50,270). These remain frozen, increasing the tax burden as incomes rise.
For self employed individuals, Class 4 National Insurance rates continue at 6 per cent between the lower and upper limits, with Class 2 contributions voluntary for lower profits. Threshold freezes extend in later years.
Business Rates and Other Considerations
Reforms to business rates in 2026 include adjusted multipliers and transitional reliefs, particularly affecting retail, hospitality, and leisure sectors. The VAT registration threshold remains at £90,000.
Conclusion
The 2026/27 tax year brings greater digital compliance through Making Tax Digital, higher rates on dividends and certain capital gains, and adjustments to allowances that could impact cash flow for small businesses and sole traders. Early preparation helps avoid penalties and uncovers opportunities to optimise your position.
Ready to Navigate the 2026/27 Tax Changes?
At Kay Peters & Co, our team of Chartered Accountants provides proactive, personalised support for small businesses and sole traders in London. Contact us today for a consultation to review your situation, implement MTD compliant systems, and plan effectively for the year ahead. Do not leave compliance and tax efficiency to chance, partner with experts who understand your needs.
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Disclaimer
The information in this article represents the best interpretation and analysis of data and facts at the date it was published. However, it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action is taken. If you would like to discuss how this applies to you, we are available to talk to you. Please make contact using the contact form on the company’s website.
