INCOME TAX RATES

What’s changing?

Income tax thresholds will be frozen for a further three years, until 6 April 2031. As wages and taxable benefits increase, individuals may find themselves in a higher tax bracket as the thresholds at which the basic, higher and additional rates of tax bite stay the same.

In addition, income tax rates for certain types of income are increasing by 2%.

Dividends

Dividend tax rates for basic and higher rate taxpayers will increase by 2% from 6 April 2026 as shown in the table below. The additional rate will remain unchanged.

	2025/26	2026/27
Ordinary rate	8.75%	10.75%
Upper rate	33.75%	35.75%
Additional rate	39.35%	39.35%

 

The charge applying to loans to participators of close companies under s.455 Corporation Tax Act 2010 will also increase to 35.75% accordingly.

Savings and property income

From 6 April 2027, interest from savings will be taxed at a higher rate than income from employment and self-employment as tax on savings income will increase by 2%.

A new property rate of tax will also be introduced from 6 April 2027, which will be 2% higher than the standard rates of income tax across all bands. The introduction of a specific rate of tax for income from property increases the possibility of further changes, i.e. a wider divergence from the rate of tax applied to other income.

The changes to savings and property income tax rates are shown in the table below.

	2025/26 (%)	2026/27 (%)	2027/28 (%)
Basic rate	20	20	22
Higher rate	40	40	42
Additional rate	45	45	47

Currently, allowances and reliefs are allocated tax efficiently, to minimise the tax liability. A further sting in the tail is that these rules are to be changed so the personal allowance is first set against employment, trading and pension income, rather than property or savings income, which will be taxed at a higher rate. This greatly reduces the scope for escaping the tax increase. A person who has taxable savings/property income of £10,000 per year will pay £200 more tax on that income in 2027/28 than currently.

The Budget documentation confirms that the income tax reducer, which replaced the deduction for financing costs, will increase to 22% from April 2027.

Who will this affect?

The changes affect all individuals who pay tax on their dividend income, whether from being a shareholder in a company they own or work in, or from holding shares as investments from 6 April 2026.

The savings and property income tax hikes affect unincorporated landlords and savers who pay tax on their savings and/or property income from 6 April 2027. According to the Budget 2025 document, over 90% of taxpayers do not pay tax on savings income. This is largely due to the personal savings allowance.

The savings and dividend tax rates will apply to the whole of the UK, but the property tax rates will not apply to Scotland. The government intends to work with the devolved governments of Scotland and Wales to enable them to set property tax rates.

Can I have a practical example?

Dividends

Example

Luke is the sole shareholder of Acom Ltd, which makes £75,000 per annum. Luke always extracts all available profit each year.

In 2025/26, he takes a salary of £12,570 and the balance (£62,430) as dividends. His tax liability for 2025/26 is calculated as:

Income (£)	Tax rate	Tax liability (£)
12,570	effectively 0%	0
37,700	8.75%	3,299
24,730	33.75%	8,346
Total		11,645

In 2026/27, once dividend rates increase, Luke’s tax liability will increase by almost £1,250 as shown below.

Income (£)	Tax rate	Tax liability (£)
12,570	effectively 0%	0
37,700	10.75%	4,053
24,730	35.75%	8,841
Total		12,894

Savings income

Example

Dylan’s state and private pensions total £60,000 per annum and he has interest income of £1,000. He is entitled to the personal savings allowance, which is £500 for a higher rate taxpayer, so the remaining £500 is taxable.

In 2026/27, Dylan will pay £100 income tax on the interest. In 2027/28, this will increase to £110.

Are there any opportunities for savings?

Dividends

As the change to dividend tax rates is coming on 6 April 2026, those in control of their dividend income should accelerate dividends where possible before this date, whereas investors need to make the most of their ISA allowance.

Dividends from shares held within an ISA aren’t taxable. You should therefore utilise your annual ISA allowance to shelter investments from income tax (and capital gains).

Married individuals and those in a civil partnership should review how their shares are owned and transfer shares between them to minimise their combined tax bill. There are no capital gains tax (CGT) or inheritance tax (IHT) implications when assets are transferred between spouses/civil partners.

Owners of trading companies can transfer shares to other individuals (such as their children over the age of 18) without triggering a CGT liability. This is done by claiming holdover relief. This does of course mean the owner manager has less income; if they are already supporting others it may be more tax efficient to pay dividends directly, e.g. to children at university.

Owner managers should consider paying additional dividends prior to 6 April 2026 to take advantage of lower tax rates.

Don’t forget about outstanding directors’ loans. If they are to be cleared with a dividend it will be more expensive to do so after 6 April 2026.

Owner managers should also consider alternatives to larger dividends, such as a mixture of exempt benefits and pension contributions.

Owner managers with cash savings can lend money to their company and extract interest income as opposed to dividend income. This may be more tax efficient between 6 April 2026 and 5 April 2027, before tax on savings income increases.

Savings income

As most people do not pay tax on their savings income, drastic action is unlikely to be necessary. Utilising ISA and tax-free allowances are key to tax efficiency.

Ensure you make full use of ISAs to keep as much of your savings income tax free where it exceeds the personal and savings allowances. For 2025/26 and 2026/27, you can invest £20,000 each tax year in a cash ISA. For under 65s, this falls to £12,000 from 6 April 2027.

Individuals who are married or in a civil partnership should also review how their cash savings are held, making changes where necessary to ensure allowances and lower rate bands are not wasted.

As the tax increase is over a year away, those with large amounts of savings income should review their investment strategies and consider whether it would be better to pay down loans or mortgages, make pension contributions or invest in stocks and shares or premium bonds instead. Older individuals with potential IHT exposure should look to make gifts rather than build excessive savings.

Property income

Where a landlord’s rental income is their main source of income, a longer-term tax-saving strategy may be worthwhile.

Married individuals and those in a civil partnership should review how their properties are owned and transfer property interests between them to minimise their combined tax bill. There are no CGT or IHT implications when assets are transferred between spouses/civil partners.

Where property is held jointly, income is automatically split 50:50. If, however, the underlying ownership of the property is not 50:50, individuals can elect to split the income in accordance with their actual ownership. This can be done using HMRC’s Form 17.

Where possible, revenue expenditure should be delayed until after 5 April 2027 to reduce income taxable at the new rates.

Property improvements do not reduce profits and as such there is no tax benefit to delaying. An improvement is capital in nature when it increases the value of your property, e.g. by adding an extension or loft conversion. Whereas “repairs” to a property are revenue in nature and do reduce profits. A repair would include, e.g. modernising the kitchen by replacing it with a new kitchen that is of a similar standard to the old one.

New landlords can often reduce and control their income tax exposure by operating via a company if they will not need to extract all profits.

While landlords with existing property portfolios can incorporate, the threshold to do so without incurring an immediate CGT charge is set high. This is an area that is widely misunderstood and only landlords who are genuinely working on their property business for more than 20 hours per week should consider whether they’re eligible for incorporation relief. It was announced in Budget 2025 that incorporation relief will need to be claimed from 6 April 2026. The relief currently applies automatically and this move is likely in response to the incorporation of property portfolios.

Even where CGT is not in point, the stamp duty land tax (SDLT) charge is usually significant. Relief is available for genuine partnerships that incorporate but, again, HMRC is likely to scrutinise such transactions. A common misunderstanding is the interaction between SDLT and outstanding mortgages. Where there is an outstanding mortgage, it counts as additional consideration and increases the SDLT liability, as opposed to reducing it, when the new owner, i.e. the company, takes on the debt.

If incorporating is too costly, landlords looking to grow their portfolio can begin using a company for any new property purchases to shelter the profits from income tax.

INCORPORATION RELIEF

What’s changing?

Incorporation relief is a relief from capital gains tax (CGT) when a business is incorporated, e.g. when a sole trader transfers their business to a new company where all the assets (excluding cash) are transferred, and the consideration is wholly or partly in the form of shares. It is a special form of holdover relief, deferring any tax charge on a gain, e.g. on goodwill, until the shares are disposed of.

The relief currently applies automatically such that there is no requirement to make a claim via a tax return or in writing.

From 6 April 2026, the relief must be claimed on a self-assessment tax return.

The motivation for the change is not disclosed in the Budget documentation. However, there is speculation that it is aimed at businesses where relief would be unlikely to apply to, e.g. residential letting businesses. Requiring a claim means that the taxpayer flags a potential CGT event to HMRC, which may in turn choose to take a closer look.

Who will this affect?

Owners of unincorporated businesses that will be incorporated on or after 6 April 2026. This can include sole traders, partners in a partnership or trustees.

Can I have a practical example?

Example

James is self-employed. He wants to incorporate to benefit from limited liability and a level of professionalism associated with a company. If James incorporates the business prior to 6 April 2026, providing all conditions are met then the relief from CGT applies automatically and James does not need to make a claim. He will still enter the end date for his self-employment on his self-assessment tax return, and HMRC will be aware of the new company due to Companies House and corporation tax registration.

Whereas, if James does not incorporate until 6 April 2026, he will need to actively claim incorporation relief on his self-assessment return. The claim will be made after the incorporation has taken place, but James may be required to provide information on his tax return to enable HMRC to assess whether the relief is due. This could include listing the assets that have been transferred to the new company and the nature of his business.

Are there any opportunities for savings?

There is perhaps an opportunity to save some administration time and professional fees by bringing a planned incorporation forward to the current tax year. However, this should not be prioritised over other tax and/or commercial reasons to incorporate on or after 6 April 2026.

SHARE REORGANISATIONS

What’s changing?

This measure appears to have been introduced in response to HMRC’s defeat at the Court of Appeal in Delinian vs HMRC in 2023. The case illustrates the perceived issue with the previous rules, so let’s start there. In a nutshell, Delinian (D) (“Euromoney” as it was called previously), was planning to sell shares to a third-party company. Initially, in exchange for the shares, D was to receive a mixture of cash and shares in the buyer company. As often happens over the course of deal negotiations, D decided it would rather receive preference shares instead of cash consideration. Cash would have been taxable upfront, whereas the gain on the issue of preference shares would be deferred under the share-for-share exchange rules. This is a deferral of capital gains where certain conditions are met, and one security is exchanged for another. Instead of incurring a dry tax charge, the new shares inherit the capital gains base cost of the old shares, essentially deferring a tax charge until the new shares are sold. This enables commercial transactions to go ahead that would otherwise be hampered by dry tax charges.

In this case, instead of simply deferring the capital gain, D was able to escape tax on the preference shares altogether. If it waited twelve months before redeeming the preference shares, it would be tax free because of the substantial shareholding exemption.

The reason D was able to do so is because the legislation allowed such reorganisations to qualify for share-for-share treatment, providing there was on overarching commercial purpose. In this case, the transaction had a bona fide commercial purpose; Euromoney was selling shares to a third party. The Court ruled that the whole transaction had to be assessed when considering whether tax avoidance was one of the main reasons for the transaction. Arrangements could not be separated for individual scrutiny, although D’s planning amounted to tax avoidance, it was not the main or one of the main purposes for the transaction and so HMRC’s appeal was dismissed.

The new rules, which apply from 26 November 2025 (Budget 2025), remove the carve out for a commercial purpose and are strengthened to ensure that any arrangements where the main purpose, or one of the main purposes, of the arrangement is to secure a tax advantage that they would not ordinarily have been entitled to, do not qualify for the share-for-share exchange rules. The anti-avoidance rules will apply to each party to a transaction rather than the transaction as a whole.

In addition, the anti-avoidance rules now also apply to shareholders that hold 5% or less of the share capital, where previously they were excluded.

Who will this affect?

This will affect company reorganisations and share exchanges taking place after 26 November 2025.

There are transitional rules for transactions that submitted a clearance application to HMRC prior to 26 November 2025. If a clearance has already been obtained, then the previous rules will only apply if the transaction takes place before 26 January 2026.

If a clearance request was submitted before 26 November 2025, and HMRC clearance is granted, then the old rules will apply provided the transaction takes place within 60 days of receiving clearance. This is likely to put significant pressure on pending transactions to complete over the next couple of months.

Can I have a practical example?

Example

Acom Ltd is selling shares to Bcom Ltd. Bcom Ltd is proposing to pay partly in cash and partly in ordinary shares, but deferring payment is in its interest due to the cash-flow advantage. If Acom Ltd receives cash it is subject to corporation tax, but if it receives loan notes or preference shares the tax isn’t payable until they’re disposed of. Acom Ltd counteroffers with consideration partly in ordinary shares and partly in redeemable preference shares, purely because if it waits twelve months it will qualify for the substantial shareholding exemption and won’t pay corporation tax on the redemption of preference shares. Bcom Ltd agrees to this as it won’t have to pay out for at least twelve months.

Even though this is a commercial sale, the share-for-share rules won’t apply to the preference shares aspect because the main reason for the arrangement is to avoid corporation tax.

Are there any opportunities for savings?

As the rules came into force on Budget Day, opportunities are limited to those that had already submitted clearance applications; implementing the restructuring within the set timeframes will be crucial in those cases.

For future transactions, applying for clearance well in advance will be crucial rather than optional. As the rules are new and drawn widely, it isn’t yet clear how strictly HMRC will apply them in practice and as such it will be desirable to have more time to negotiate and resubmit clearance applications as necessary.

BUSINESS & AGRICULTURAL PROPERTY RELIEF

What’s changing?

In Budget 2024, it was announced that from 6 April 2026, a £1m cap on 100% relief will apply in respect of business property relief (BPR) and agricultural property relief (APR). The measure led to significant backlash from the farming community which was largely ignored. However, in Budget 2025 a key easement was announced; the £1m allowance will be transferable between spouses, as is the case for the inheritance tax (IHT) nil rate and residence nil rate bands. This will allow the business/agricultural assets to pass to a spouse/civil partner on the first death, without wasting the £1m allowance.

Under the previous measures, the allowance was wasted if unused on death, which would have led to either a higher IHT liability or more complicated ownership structures such as the next generation owning £1m worth of business/agricultural property, and the surviving spouse/civil partner owning the remainder.

Crucially, the £1m allowance can be claimed by a surviving spouse/civil partner even if the first death occurred prior to 6 April 2026 when the cap comes into effect.

Who will this affect?

Married couples and civil partners who own business property (such as shares in a trading company, an unincorporated business or certain investment products with BPR status), and/or agricultural property (such as agricultural land and pasture) worth more than £1m. It will also affect them if the relevant property is worth less than £1m but may be worth more than £1m by the time one of them dies.

It also affects widows and widowers who have already inherited agricultural and/or business property which is worth more than £1m.

Can I have a practical example?

Example

Andrew and Agnes are married and jointly own a working farm which is worth £3m. The entirety of the value qualifies for a combination of APR and BPR. They also own other assets that will utilise their nil rate bands on death. Their wills stipulate that on the first death, the deceased’s assets will pass to the surviving spouse. On the second death, the assets will pass to their two children.

Prior to the changes announced at Budget 2025 if, e.g. Andrew died, his assets would pass to Agnes free from IHT as transfers between spouses are exempt. The issue with the policy would come to light when Agnes later dies, as her estate would only be entitled to a £1m allowance when the assets pass to their children. This would leave £2m qualifying for 50% relief and IHT of £400,000 payable. In this example, Andrew’s £1m allowance would be wasted, and, in order to utilise it, and save the family £200,000, he would have needed to change his will to leave £1m worth of the farm to his children on death.

This would have been out of sync with other IHT rules, such as the nil rate band which is transferable between spouses on death. As the £1m allowance will now be transferable, following the announcement at Budget 2025, there is no need for Andrew to change his will. The farm would still pass to Agnes tax free, but when she dies, her estate will be able to claim Andrew’s £1m allowance. Their children would therefore inherit £2m worth of the farm free from IHT, leaving £200,000 IHT to pay on the remainder.

Are there any opportunities for savings?

Widows and widowers have become entitled to an additional £1m tax free allowance overnight. In the absence of these rules, it would be necessary for owners to divide up ownership or utilise planning involving trusts.

If their asset base does not currently include assets that qualify for APR or BPR, they could look to invest in such assets (with the help of a financial advisor as such investments are typically high risk). Investing £2m in APR/BPR assets would save up to £800,000 in IHT after two years.

For married couples and civil partners, the savings are in the form of flexibility to delay succession until the second death.

MANSION TAX

What’s changing?

Council tax is a local tax that is applied in bands, with the higher bands attracting a higher charge. However, the valuations are based on the 1991 value (2003 in Wales). This is the case even if the property was built after those dates (a hypothetical historic rate is used). Each local authority sets its own rates, so properties in the same band but different areas can have different charges. Scotland has its own set of rules.

From April 2028, a high value council tax surcharge, dubbed the “mansion” tax will apply to owners of residential properties that are worth more than £2m. Unlike council tax, the charge will be levied on owners rather than occupiers. The Budget document states that council tax is the largest source of property-related tax revenue, but a typical family home in England pays more council tax than a £10m property in Mayfair.

The charge will apply as shown in the table below.

Property value (£)	Annual charge (£)
2-2.5m	2,500
2.5-3m	3,500
3.5-5m	5,000
Over 5m	7,500

The charge will increase each year in line with CPI inflation.

The government will consult on how best to support individuals who will struggle to pay, e.g. by deferring the charge until they die or sell the property. The consultation will also cover those who are required to live in a property as a condition of their job, the rules for complex ownership structures (such as trusts and partnerships) and exemptions and reliefs.

The Valuation Office Agency will conduct a valuation exercise in 2026 to determine the charge applicable from April 2028. Revaluations are expected to take place every five years.

Who will this affect?

Owners of residential properties in England that will be worth more than £2m in April 2028. It will also impact tenants of such properties as landlords will need to recoup the additional cost.

It is expected to disproportionately affect homeowners in the southeast of England.

Social housing is outside the scope of the surcharge.

Can I have a practical example?

Example

Anna and Elsie live in London. Their flat is valued at £2.4m in 2026. From April 2028, they will be required to pay an additional £2,500 alongside their council tax each year.

If property prices continue to rise, when the next valuation exercise takes place their property could be in the next bracket, with a higher annual charge.

Are there any opportunities for savings?

Opportunities to avoid the surcharge stem from managing the value of the property.

For instance, if a property is worth less than £2m, or one of the thresholds of each band shown in the table above, property improvements should be delayed until after the valuation exercise in 2026.

However, this only delays the start of being liable for the surcharge until the next valuation exercise takes place five years later, assuming property prices stay the same or continue to rise.

There is also the option to downsize or move to an area with lower property prices, but it would be advisable to wait and see the results of the consultation first as it is widely expected that asset rich, cash poor individuals will be able to defer the charge.

CAPITAL ALLOWANCES

What’s changing?

Capital allowances are the method by which tax relief is given for capital expenditure, e.g. on plant and machinery, structures and buildings and integral features. The main types of allowance are the:

• Annual investment allowance (AIA). A 100% up‑front deduction for qualifying plant and machinery expenditure (excluding cars), up to an annual limit that is currently set at £1m. Any excess expenditure is generally pooled, unless a first-year allowance (FYA) is available.
• Writing down allowances (WDAs). These give annual relief on the tax written‑down value in the pools after AIA/FYA allocations and disposals, with current rates of 18% for the main pool and 6% for the special rate pool. WDAs apply on a reducing balance, rather than a straight-line basis.
• First year allowances (FYAs). These provide enhanced relief in the year of acquisition for specified assets or policy initiatives, and any balance then enters the pools for WDA in later periods. Examples of current FYAs include “full expensing” (companies only) and environmentally friendly equipment, e.g. electric charging points.

There is also a separate type of allowance for structures and buildings.

The first change to note is that the rate applicable to the balance in the main pool will be cut to 14% from April 2026.

The second change is the introduction of a new permanent FYA from 1 January 2026. This will be given at 40% on main rate expenditure and will specifically be available to some assets that can’t be relieved using the AIA or existing FYAs.

The balance of 60% will enter the appropriate pool and be written off using WDAs in future years.

The information note states that cars, second hand assets, and assets purchased for leasing overseas will be specifically excluded.

Who will this affect?

The changes will affect both companies and unincorporated businesses. The cut in the WDA rate is self-explanatory and will result in pool balances taking longer to receive full tax relief. However, for new expenditure the new FYA will mitigate the impact.

The new 40% FYA is also of interest to both companies and unincorporated businesses in two circumstances when:

• the AIA has already been used in full; and/or
• there is expenditure that is not within the scope of the AIA or other FYAs.

Leasing businesses are likely to benefit the most, i.e. those who purchase assets then lease them to customers. Leasing is an exclusion from full expensing for companies, so a specific FYA goes some way to putting such expenditure on a more even footing with other plant and machinery purchases. However, businesses with a larger level of capital expenditure will also benefit.

Can I have a practical example?

Example

BPart Partnership has utilised its AIA for the 2025/26 year. In January 2026 it incurs £300,000 on plant and machinery. As the new FYA is available, the upfront relief is £120,000. The remaining £180,000 enters the main pool and attracts a WDA at 18% (the pre-April 2026 main pool rate) i.e. £32,400. The total Year 1 allowances are therefore £152,400.

Had the new expenditure been incurred prior to 1 January 2026, the relief would have been restricted to 18% x £300,000 = £54,000. The new rules mean an extra deduction of £98,400 for BPart.

Are there any opportunities for savings?

The new FYA increases cash flow in the year of purchase. It also adds a further layer of complexity to considering where to allocate the AIA and/or full expensing.

The inclusion of assets purchased for leasing obviously means that these assets will be cheaper to provide when tax relief is taken into account. Businesses can use this for commercial advantage by passing on some of the savings to customers to gain a competitive edge, or by using the savings to upscale the business (by purchasing further assets).

VENTURE CAPITAL SCHEMES

What’s changing?

The enterprise investment scheme (EIS) and venture capital trust (VCT) are two of the government-approved risk-finance schemes that offer generous tax breaks to private investors in smaller companies that are in the early stage of their life.

The EIS is the most generous, offering 30% income tax relief on qualifying investments, the opportunity to defer other capital gains while the EIS shares are held, a capital gains tax (CGT) exemption for the EIS shares themselves, and automatic share loss relief (against general income) if the EIS shares are disposed of at a loss (or if the company fails).

VCTs offer a similar income tax relief, but the amount that can attract relief is significantly lower, capped at £200,000 of qualifying investments in a tax year. There is no deferral relief, but the VCT shares can be CGT exempt. Additionally, dividends received from a VCT are exempt from income tax as long as the investment limits have been adhered to.

Despite the name, VCTs are actually companies that invest in EIS-type companies on behalf of their investors. The “VCT” part is really a status acquired by meeting the conditions required by HMRC.

The first change to be aware of is that the rate of income tax relief applying to new VCT investments is being cut from 30% to 20% from April 2026.

As you might expect, the generous tax reliefs can only be accessed if a number of conditions are met. There are conditions for the investor, the issuing company/VCT, and general conditions surrounding the mechanics of the investment itself. The Budget has announced changes that affect the issuing company/VCT. There are no changes in the conditions for the investor.

The EIS

Currently, a company must pass a “gross assets” test in order to offer investors EIS relief. This is to ensure the relief is restricted to smaller companies. The gross asset limit a company must not exceed is to be increased to £30m (from £15m) immediately before the issue of the shares or securities, and £35m (from £16m) immediately after the issue.

Monies paid by investors in anticipation of, and conditional upon, a subsequent share issue do not count toward the gross assets total.

Companies that were previously excluded from EIS for being too asset rich may now be able to offer investment.

There is also an annual investment limit that restricts the amount a company can raise via EIS. Currently, this is £5m with an enhanced £10m limit for knowledge intensive companies (KICs). These limits are being doubled to £10m and £20m respectively.

Finally, there is a lifetime limit that restricts the total a company can raise via EIS during its lifetime. Currently, this is £12m with an enhanced £20m limit for KICs. These limits are being doubled to £24m and £40m respectively.

VCTs

In addition to the cut in the rate of income tax relief, the gross asset test applying to VCTs is being increased in the same way as the EIS. The gross asset limit a VCT must not exceed is to be increased to £30m (from £15m) immediately before the issue of the shares or securities, and £35m (from £16m) immediately after the issue.

Who will this affect?

The changes in respect of the limits apply to the issuing company/VCT, rather than the investors, so the information is most likely to be of interest to the board of directors, particularly if a round of funding is being planned. The increased limits should be factored in, and it might be worth pushing back the issue date if it is possible to increase the amount that could be raised.

The cut to the VCT income tax relief will be of interest to investors.

Can I have a practical example?

Example

Acom Ltd has been trading for three years. It initially raised £10m via EIS investments. Its business plan anticipated that phase two of its growth and development plan would require a further £8m after five years of trading. It was originally planned to offer £2m further EIS shares and, with the rest being sought elsewhere. Acom can now amend its funding plans and look to raise the full £8m via issuing new EIS shares.

Are there any opportunities for savings?

For the issuing company, the opportunities stem from being able to offer additional investment opportunities attracting tax relief. Companies that have already hit their lifetime limit should take particular note, as it may be possible to reopen EIS funding, as long as the other conditions are met.

For investors, there is a clear saving opportunity to be had by accelerating VCT investments to fall before 6 April 2026. This will see an additional 10% income tax reduction compared with an investment made on or after that date.

Remember that income tax relief for VCT investments is dependent on enough of an income tax liability to utilise it fully. If the investment amount x 30% exceeds the income tax liability for the year, the relief can only reduce the tax to £nil. It can’t create a negative liability, so anyone considering making additional investments to beat the rate change should check it’s actually worth it.

If the additional tax relief is a deal breaker and there is no scope to fully utilise VCT relief in 2025/26, the investor could consider waiting and making an EIS investment in 2026/27 instead. The income tax relief rate for EIS will still be 30%.

Example

Cleo has been investing £50,000 in May each year into VCTs for the last few years from her savings, which removes £15,000 of the £17,000 income tax she would otherwise pay on her pension. She intends to bring her May 2026 investment forward to March to beat the rate cut. However, as she only has £2,000 of income tax liability to offset, the effective rate of relief on the additional investment would only be 4%! In this situation, Cleo should simply wait and make her investment in May as usual, as this will net an additional £8,000 in relief. Alternatively, she could switch her investment strategy to continue accessing relief at 30%.

ENTERPRISE MANAGEMENT INCENTIVE

What’s changing?

The enterprise management incentive (EMI) is a tax‑advantaged share option scheme for smaller, higher‑risk trading companies. It allows targeted options to be granted to selected key employees, typically with no income tax on grant and with capital gains tax usually arising on sale of the shares acquired on exercise. The EMI is flexible in design and can be tailored to commercial milestones and retention objectives, unlike all‑employee plans.

Eligibility and limits include that an employee must work at least 25 hours a week (or, if less, at least 75% of their total working time) and must not hold a material interest in the company. Options may be discounted but must not be exercisable more than ten years from grant. Each employee’s unexercised qualifying options are capped at an unrestricted market value of £250,000, with a three‑year blocking rule and any company share option plan (CSOP) options counting towards the limit. Company‑wide, there is a £3m cap on the unrestricted market value of shares subject to unexercised qualifying options; HMRC advance valuations are commonly agreed and typically remain valid for 90 days. Companies must have gross assets not exceeding £30m at the time options are granted and have a maximum number of full-time (or full-time equivalent) employees of 250.

On exercise within ten years, no income tax should arise if the option price is at or above market value; a discount creates an income tax charge, and exercising after ten years falls outside the EMI. Certain disqualifying events can curtail relief unless exercise occurs within 40 days. Employers normally obtain a corporation tax deduction equal to market value at exercise less the price paid. Compliance includes notifying each grant and filing annual returns by 6 July; for options granted on or after 6 April 2024, there is a 92‑day notification window.

The Budget included the announcement that several of the key thresholds and limits will be changed to expand the scheme. From April 2026 the:

• cap on shares under option will increase from £3m to £6m
• gross assets test will increase from £30m to £120m
• maximum number of employees will increase from 250 to 500; and
• maximum holding period will increase from ten years to 15 years (including options already in existence).

Additionally, from April 2027 the requirement to notify HMRC of a grant of options will be removed.

Who will this affect?

The changes will unlock access to the EMI for companies, or groups of companies, that were previously excluded due to their size. The £30m limit has been static since 2002. The other changes are a similarly welcome expansion and will help companies already using the EMI that have been unable to issue new options due to the constraints.

Can I have a practical example?

Example - gross assets

Acom Ltd offers a share option scheme to key employees. However, it cannot use the EMI as it has gross assets of £60m. It has been using the less-generous CSOP instead. From April 2026, Acom will be able to offer EMI options to its employees. It will need to remember that unexercised CSOP options count toward the employees’ £250,000 limit.

The £250,000 limit for each employee is not being increased.

Example - additional options

Bcom offers the EMI and currently has 20 employee participants with options over shares worth £2.8m. It wants to offer options to six newly promoted employees over £150,000 each. It cannot currently do this, as it only has £200,000 of its allowance left. Additionally, the existing options are nine years old but are currently slightly underwater (the exercise price exceeds the value of the underlying shares) in the aftermath of the pandemic but has been steadily recovering. This means there is no motivation for the employees to exercise them, and the options are at risk of expiring. The company expects to grow significantly in the medium term. The changes mean that the new options can be granted on or after 6 April 2026, and the existing option holders have a further five years to wait for the share price to realise some growth.

Are there any opportunities for savings?

Companies using a CSOP due to being excluded under the existing rules may be eligible for the EMI after 6 April 2026. The EMI is far more generous, as employees are limited to holding options up to £60,000 under a CSOP compared with £250,000 under the EMI. As share options are often used as a partial alternative to bonuses, larger companies can enjoy improved cash flow by using the scheme. There is an additional indirect benefit in that the employees holding options have a vested interest in ensuring the company achieves growth, and the EMI is often undertaken with the long-term aim of a takeover, so any tax arising for the employees can be paid out of the proceeds with planning surrounding exercise.

PENSIONS AND SALARY SACRIFICE

What’s changing?

Pension salary sacrifice involves the employee formally agreeing to give up a portion of their salary. In return, the employer makes a pension contribution of the amount forgone, i.e. the amount contributed to the pension scheme is the same, it is just routed direct from the employer. This effectively converts employee pension contributions which would otherwise be payable out of salary subject to Class 1 NI into employer pension contributions (suffering no NI).

This is a win-win situation of lower NI for employees and employers on any level of uncapped pension contribution and, along with the immediate tax relief at the employee’s marginal rate of tax, results in a higher take-home pay.

From 6 April 2029, a £2,000 annual cap will apply to salary sacrifice pension contributions that will qualify for NI relief, enforced by a reporting requirement through RTI. Any excess contributions will be subject to NI for both the employee and employer.

Excess contributions will be within the remit of the optional remuneration arrangements rules. That is, the amount sacrificed will be taxed as earnings via the payroll.

There are some obvious complications here. What about employees who change jobs partway through the year, or those with multiple employers operating salary sacrifice?

A consultation will be held in due course which should give us more detail on how the cap will work in practice.

Who will this affect?

This will particularly impact lower paid employees paying an 8% NI rate, especially if their contributions are well in excess of the £2,000 cap, and all employers (15% NI rate). Higher rate taxpayers will be less impacted in terms of primary Class 1, as they only pay at 2% anyway.

Can I have a practical example?

Example - current rules

John works for Acom, earning £36,000 annually. He agrees a salary sacrifice arrangement with his employer where he will give up £300 per month in exchange for an employer pension contribution. Contractual pay is reduced to £2,700 and the employer pays £300 to the scheme. The income tax saving on the £300 sacrifice at 20% = £60. Because the £300 falls within the monthly main NI contribution band at 8% (given £3,000 is within £1,048–£4,189), the employees’ NI saving = 8% × £300 = £24.

The net personal cost for £300 into the pension for John = £300 − £60 − £24 = £216. This compares to £240 for a net pay arrangement, which is deducted from taxable (but not NIable) pay.

However, the sacrifice also reduces employer Class 1 secondary NI on the £300, creating a saving that some employers share by boosting the pension contribution; here the saving is 15% x £300 = £45. So, there is an overall saving of £69 by using salary sacrifice. If Acom recycles the saving into the scheme, John gets a £345 pension boost at a personal cost of £216.

 

Example - after April 2029

John agrees to join Acom’s hybrid pension scheme. Here, the first £2,000 will continue under the salary sacrifice, but the rest will operate under a net pay arrangement. Total income tax relief is the same as before; relief equals £720 per year (20% of £3,600) = £60 per month. The hybrid scheme employee’s NI saving equals the 8% primary rate applied to the sacrificed portion only: 8% × £2,000 = £160 per year (≈ £13.33 per month). On the remaining £1,600 contributed via net pay, NI is still charged on the corresponding cash earnings, so there is no NI saving on that element.

Relative to a pure net pay arrangement (where all £3,600 is via net pay and none via sacrifice), the incremental advantage of the hybrid scheme is exactly this £160 per year employees’ NI saving. This is a significant drop in the saving under the current rules (£288).

The employers’ Class 1 secondary NI saving on the £2,000 sacrificed is 15% × £2,000 = £300 per year (£25 per month – a reduction from £45). 

If the employer fully recycles its £300 NI saving as an additional employer pension contribution, total annual pension funding rises from £3,600 to £3,900 at a personal cost to the employee of £2,720 – or £226.67 per month (recall it was £216 under the current rules). Under a net pay arrangement, the net cost would be £240 per month.

It’s clear that there will be some savings enjoyed by salary sacrifice, and this will be most significant for lower-paid employees as a greater proportion of their contributions are likely to be covered by the £2,000 allowance.

Are there any opportunities for savings?

One obvious answer will be to accelerate contributions ahead of April 2029. However, this will clearly have a cash-flow impact. Higher rate taxpayers are unlikely to be concerned about doing this in any case.

It may be possible to avoid the optional remuneration arrangements (OpRA) rules altogether. The OpRA rules apply in two situations; these are described as types A and B:

Type A. These are arrangements under which an employee gives up the right, or the future right, to receive an amount of cash earnings, e.g. salary, chargeable to income tax in exchange for one or more benefits in kind (perks).

Type B. These are arrangements under which the employee is given the choice by their employer between earnings and a benefit and opts for the benefit.

It’s easy to think that the OpRA rules prevent employers from providing tax and NI-efficient benefits instead of salary. They don’t. If an employee doesn’t have the right to choose between receiving salary or benefits, then neither A nor B applies and so the benefits aren’t subject to the OpRA rules.

Example

Acom is in the process of reviewing its employees’ salaries. The last 18 months have been financially tough for the business but it wants to reward its employees who have all worked hard to keep it going. To keep down the cost of increased remuneration for its workers Acom wants to offer them enhanced pension contributions instead. Because the employees had no choice between a salary increase or the benefit the OpRA rules don’t apply.

This may be a way that efficient arrangements can continue after 2029. However, we don’t know the full story yet, and the government could introduce rules to prevent this, or simply cap employer contributions altogether.

ELECTRIC VEHICLE EXCISE DUTY

What’s changing?

Vehicle excise duty (VED) is payable in respect of non-electric vehicles in exchange for a vehicle licence. This used to take the form of a tax disc with a prominent expiry date, allowing for easy inspection. However, since 2014 the “licence” is really just a status on the DVLA database.

10.1.1. Current system for electric cars etc.

The VED charge for electric, zero and low-emission models, and hybrid cars depends on when the car is first registered.

Electric, zero or low emission cars registered on or after 1 April 2025

There is a low first year rate of vehicle tax set at £10 from 1 April 2025. From the second tax payment onwards, owners will pay the standard rate of £195.

Electric, zero or low emission cars registered between 1 April 2017 and 31 March 2025

Owners will pay the standard rate of £195.

Electric, zero or low emission cars registered between 1 March 2001 and 31 March 2017

The tax rate for these vehicles is £20.

Hybrid and alternatively fuelled vehicles (AFVs)

The £10 annual discount for hybrid and AFVs has been removed. The rate owners will pay depends on when the vehicle was first registered. If the vehicle was:

• registered before 1 April 2017 - this rate will depend on the vehicle’s CO₂ emissions (check the current rates for these vehicles)
• registered on or after 1 April 2017 - owners will pay the standard rate (£195).

Pay-per-mile

From April 2028, an electric VED (eVED) will be introduced. This is to balance the loss in fuel duty which is occurring as more people switch from petrol and diesel cars. The rates will be 3p per mile for electric vehicles, and 1.5p per mile for hybrids, reflecting that hybrid cars still incur fuel duty.

The eVED will be payable on top of the VED rates applicable (see above).

While there is no specific technical detail yet, the Budget documentation says that drivers will estimate their annual mileage and pay the charge upfront, either annually or monthly. Their actual mileage will be checked during their annual MOT (or at the first/second anniversary for new cars), and the payments will be reconciled (refunded for overpayment, charged for underpayment).

For a typical electric car driver covering around 8,500 miles a year, the estimated additional cost in the first year (2028/29) will be approximately £255. This is still expected to be roughly half the amount an average petrol or diesel driver pays in fuel duty for the same mileage. 

Who will this affect?

The change will affect anyone who drives an electric or hybrid vehicle. It may also impact employers that provide company cars to employees.

Can I have a practical example?

Example

Molly drives an electric car that was registered on 1 April 2022 and covers 10,000 miles on average each year. She currently pays £195 in VED annually. From 2028, she will also need to pay £300 in eVED. Molly’s friend Jess drives a 2014 diesel car with emissions of 122g/km. Jess pays £165 annually in VED. Jess also drives 10,000 miles each year at an average fuel consumption of 40 miles per gallon, meaning she uses around 1,130 litres of fuel annually. The current flat rate of fuel duty is 52.95p per litre, so Jess pays approximately 1,130 x £0.5295 = £598.34 in fuel duty. Molly’s eVED will be almost half of this.

Are there any opportunities for savings?

Aside from cutting unnecessary journeys to keep mileage down, drivers should keep in mind that charging habits can have an impact on the overall cost of electric vehicles. Drivers who can charge at home using cheaper off-peak electricity tariffs will still find EVs more economical overall. Those reliant on more expensive public charging infrastructure may find their per-mile costs closer to, or even exceeding, those of a traditional internal combustion engine car when the eVED kicks in.