The 2026/27 tax changes catching small business owners out, and how to respond

A number of tax changes took effect on 6 April 2026, and most of them arrived with very little publicity. There were no headlines and no letters through the door, only higher bills and a new way of reporting that has caught a lot of people off guard.

If you run a limited company, take dividends, or file a Self Assessment return as a sole trader or landlord, at least one of these changes almost certainly affects you. Some of them alter your tax bill, and one of them alters the case for trading through a company at all.

Below we set out what has changed for 2026/27, in plain English, and what you can do about it.

Dividend tax has risen, and the allowance is still small

The dividend change is catching out more company directors than any other, because it affects the way most of them pay themselves, which is a small salary topped up with dividends.

From 6 April 2026 the basic rate of dividend tax went from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%, while the additional rate stays at 39.35%. For a typical director that is a rise of two percentage points on most of what they draw.

On top of that, the tax-free dividend allowance is still only £500, a fraction of what it once was, so almost every pound of dividend you take is now taxed, and at a higher rate than last year.

In money terms, if you are drawing £40,000 of dividends in the basic-rate band, the two-point rise means roughly £800 more tax on the same income, without anything about your own arrangements having changed.

The employer NI increase a sole director cannot avoid

The second change is on the salary side. Employer (secondary) National Insurance is now charged at 15% on salary above £5,000 a year, which is both a lower threshold and a higher rate than many directors planned around when they last set their salary.

For one-person companies there is a further difficulty. The £10,500 Employment Allowance, which normally covers the first part of an employer's NI bill, cannot be claimed by a company whose only employee is its sole director. If it is just you on the payroll, you therefore pay that 15% on everything above £5,000 with nothing to set against it.

The old habit of paying a higher salary to save corporation tax therefore needs a fresh look. The figures that once made it work have moved, and the right salary level for 2026/27 is not the same as it was two years ago.

Why pulling profit out of a company no longer pays

When the dividend rise and the employer NI change are put together, they lead to a conclusion that a lot of directors will not have heard yet.

For 2026/27, a single-director company that draws all of its profit as salary and dividends is generally worse off on take-home pay than the same person trading as a sole trader, at every profit level. Once corporation tax, dividend tax and employer NI are all taken into account, the two are broadly level at around £58,000 of profit, and the sole trader is generally ahead either side of that.

A limited company can still be the right choice for many people, although the reasons for having one have changed. There are now three main advantages.

The first is the ability to retain and reinvest profit. Money left in the company is taxed at 19% corporation tax on profits up to £50,000, rising to an effective rate of around 26.5% in the marginal band and 25% above £250,000, which is far less than the combined cost of drawing it all out and paying dividend tax on top. The second is limited liability, which keeps your personal assets separate from the company's debts if things ever go wrong. The third is credibility, since larger customers, lenders and suppliers often prefer, and sometimes require, to deal with a limited company.

The case for a limited company today therefore rests on building and protecting wealth inside the business. If you incorporated purely to save tax on the money you take out, it is worth checking whether that still holds. Our sole trader vs limited company calculator runs your own figures on the 2026/27 rates so you can see where you stand.

Making Tax Digital for Income Tax is now live

The third change is to do with how you report your income to HMRC, and it has already started.

From 6 April 2026, Making Tax Digital for Income Tax is mandatory for sole traders and landlords whose gross income is over £50,000. Instead of one Self Assessment return a year, you keep digital records, send HMRC an update every quarter, and then submit a final declaration to close the year off.

The threshold comes down over the next two years, so more people are brought in each April. It applies to those with gross income over £50,000 from 6 April 2026, over £30,000 from April 2027, and over £20,000 from April 2028.

Two points cause confusion. The first is that the threshold is measured on gross income, meaning your turnover before expenses are deducted, so it catches more people than expect it. The second is that MTD changes how often you report to HMRC, while the dates on which you pay your tax are unchanged. Our full Making Tax Digital guide goes through the quarterly deadlines, the software and the penalties.

What to do about it

None of this needs to be alarming, but it does need looking at before the figures start working against you. There are three practical steps we would suggest.

In each case, dealing with the point early costs little and can save a good deal of tax, and most of the unpleasant surprises we see come from leaving these decisions too late.

• Recheck your salary and dividend split, because the best mix for 2026/27 is different from last year's. A short review will confirm that you are not overpaying on the new rates, and this is a central part of our tax planning and advisory work.
• Consider what you want the company to do for you. If you are taking everything out, run the sole trader vs limited comparison to see whether that still makes sense. If you are building the business, it is worth leaving profit in the company at 19–26.5% instead of drawing it out at dividend rates.
• Get ready for MTD if it applies to you. If your gross income as a sole trader or landlord is over £50,000, you are already within the regime, so it is sensible to move onto cloud software and quarterly reporting before it becomes a rush.