The 2026/27 tax changes catching small business owners out — and what to do

A run of changes landed on 6 April 2026, and most of them arrived without much fanfare. No headlines, no letters through the door — just quietly higher bills and a new way of reporting that catches people off guard.

If you run a limited company, take dividends, or file a Self Assessment as a sole trader or landlord, at least one of these changes almost certainly affects you. Some of them change your tax bill. One of them changes the whole case for how you should be trading.

Here's what's actually changed for 2026/27, in plain English — and, more importantly, what to do about it.

Dividend tax went up — and the allowance is tiny

This is the change catching out the most company directors, because it hits the way most of them pay themselves: a small salary topped up with dividends.

From 6 April 2026, the dividend tax rates rose. The basic rate went from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. The additional rate stays at 39.35%. That's a two-percentage-point jump on most of what a typical director draws.

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 taxed at a higher rate than last year.

In real terms: if you're drawing, say, £40,000 of dividends in the basic-rate band, that two-point rise is roughly £800 more tax for exactly the same income. Nothing you did changed — the rate did.

Employer NI is higher, and a solo director can't dodge it

The second squeeze is on the salary side. Employer (secondary) National Insurance is now charged at 15% on salary above just £5,000 a year — a lower threshold and a higher rate than many directors last planned around.

Here's the sting for one-person companies: the £10,500 Employment Allowance, which normally wipes out the first chunk of employer NI, cannot be claimed by a single-director company with no other employees. So if it's just you on the payroll, you pay that 15% from £5,000 upwards with nothing to offset it.

That's why the old reflex of paying a higher salary to save corporation tax needs a fresh look. The numbers that made it work have moved, and the right salary level for 2026/27 isn't the same as it was two years ago.

The honest upshot: extracting profit from a Ltd no longer wins

Put the dividend rise and the employer NI change together and you reach a conclusion a lot of directors won't 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 than the same person trading as a sole trader — at every profit level. The lines are broadly level around £58,000 of profit, with the sole trader generally ahead either side, once you account for corporation tax, dividend tax and employer NI stacked on top of each other.

That doesn't mean a limited company is the wrong choice. It means the reason to have one has changed. The advantage now is in three things:

Retaining and reinvesting profit — money left in the company is taxed at just 19% corporation tax (up to £50,000 of profit), rising to an effective ~26.5% in the marginal band and 25% above £250,000. That's far less than pulling it all out and paying dividend tax on top. Limited liability — your personal assets sit behind the company, which matters if things ever go wrong. And credibility — larger customers, lenders and suppliers often prefer, or require, dealing with a limited company.

So the modern case for a limited company is about building and protecting wealth inside the business, not maximising what you take home this year. If you're incorporated purely to save tax on extraction, it's worth checking whether that still holds. Our sole trader vs limited company calculator runs your own numbers on the 2026/27 rates so you can see where you actually stand.

Making Tax Digital for Income Tax has arrived

The third change is less about how much you pay and more about how you report it — and it's already live.

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 a year, you keep digital records and send HMRC a quarterly update, then a final declaration to tie the year off.

The threshold steps down over the next two years, so more people are pulled in each April: over £50,000 from 6 April 2026 (now); over £30,000 from April 2027; and over £20,000 from April 2028.

Two things people get wrong. First, the threshold is on gross income (your turnover before expenses), not profit — so it catches more people than they expect. Second, MTD changes the reporting rhythm, not your tax payment dates: those stay exactly as they are. Our full Making Tax Digital guide walks through the quarterly deadlines, the software and the penalties.

What to actually do about it

None of this needs to be alarming. It does need a look before the numbers quietly work against you. Three practical moves stand out:

The thread through all of it is the same: small, timely decisions save real money, and nasty surprises come from leaving them too late.

• Recheck your salary-and-dividend split. The optimal mix for 2026/27 is different from last year. A short review makes sure you're not overpaying on the new rates — this is core tax planning and advisory work.
• Decide what your company is actually for. If you're extracting everything, run the sole trader vs limited comparison. If you're building the business, lean into retaining profit at 19–26.5% rather than pulling it out at dividend rates.
• Get MTD-ready if it applies to you. If your gross income is over £50,000 as a sole trader or landlord, you're in the regime now — get onto cloud software and quarterly reporting before it becomes a scramble.