Many digital platforms and online marketplaces in the UK, such as eBay, typically consider a seller to be a trader if they list items frequently or in bulk, or if the individual is perceived as selling items with the intent to generate profit. Being classified as a trader leads to additional fees not applied to private sellers. In addition, if 30 or more sales transactions are completed or total sales exceed approximately £1,707 after fees, eBay and other similar platforms are obliged to report such transactions and certain other information to HMRC as trading. HMRC will therefore expect such income to be declared on a self-assessment tax return. Such platforms will notify the seller that the information has been shared with HMRC.

Trading or not

The £1,707 threshold does not mean that gross earnings below this amount need not be declared as legislation requires declaration above the trading allowance of £1,000. The trading allowance allows taxpayers to earn up to £1,000 in gross trading income or what HMRC terms as ‘casual services’ (which would include selling on eBay or such activities as carers, gardening, etc.) per tax year without having to pay tax or declare to HMRC.

Differentiate – business or hobby

Many would say that such a limit would equate to being a hobby, but HMRC does not rely on any monetary test to determine trading, instead looking at the overall nature of the activity. The difficulty lies in the fact that many activities sit somewhere in between.

HMRC often refers to a set of indicators known as the ‘badges of trade’ when deciding whether an activity constitutes a business. These are not strict rules but guiding principles.

HMRC guidance (in the Business Income Manual at BIM20205) lists the badges as follows:

1. profit-seeking motive;

2. the number of transactions;

3. the nature of the asset;

4. existence of similar trading transactions or interests;

5. changes to the asset;

6. the way the sale was carried out;

7. the source of finance;

8. interval of time between purchase and sale; and

9. method of acquisition.

One key badge is the first ‘badge’ – whether there is the intention to make a profit. If an individual is seeking to make a profit, adjusting prices, marketing their goods or services, or expanding operations, this points strongly towards a business. Consistent losses over time, especially without a credible plan to become profitable, may suggest a hobby instead.

Another significant ‘badge’ is the frequency and regularity of transactions. A one-off or occasional sale is less likely to be considered a business, although legislation does include ‘any venture in the nature of trade’ which allows for the possibility of isolated or speculative transactions being ‘trading’. The quantity of the purchased item can also indicate a trade. The oft-cited tax case under this heading is Rutledge v CIR [1929] 14 TC 490, where the transaction involved the purchase and sale of one million rolls of toilet paper.

The nature of the asset or service is also relevant. Some items are more likely to be traded for profit (e.g. a consignment of mobile phones or the purchase of materials) with the intention of turning those items into products for sale. Items such as furniture, electronics or personal vehicles, whilst having a value, are primarily used for personal enjoyment rather than trading for profit.

The time lag between purchase and sale may be important in establishing whether there is a trade. A short period of ownership suggests trading, whereas an asset held for some time or owned for a time personally before selling is in a stronger position to argue that the asset was purchased as an investment rather than a trading activity.

Practical point

Whether a sale is undertaken for profit or enjoyment, clear records of purchases, holding periods and the intended use of items could help justify the classification of the sale as a trade or hobby to HMRC.

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Legislation has been published in draft for inclusion in the Finance Bill which will bring unused pension pots within the charge to inheritance tax from 6 April 2027.

In light of this change, pension savers may be considering withdrawing pension funds to prevent such a charge. Is this a good idea?

The first point to note is that this is not yet law and, assuming it does come into effect, it will not do so until 6 April 2027. Therefore, there is no need to be hasty. There is also much speculation that the forthcoming Budget will include further pension changes; but as yet, whether this comes to pass and what such changes will look like is not yet known.

Accessing personal pension savings

Anyone with a money purchase pension plan can currently access this once they have reached age 55. This is to rise to 57 from 6 April 2028.

It should be noted that taking a pension before age 55 (or before age 57 after 6 April 2028) will trigger an unauthorised payment charge. This is potentially very costly and, depending on the amount of the pension pot, which is accessed, could be as much as 55%. At best, the charge will not be less than an IHT charge on unused funds and may actually be more.

Where a person has reached age 55 and wants to flexibly access their pension pot, currently they can take a tax-free lump sum of 25% (capped at £268,275). It remains to be seen whether the Chancellor will opt to change this. Once the tax-free lump sum has been taken, further withdrawals are taxed at the recipient’s marginal rate of tax. When making withdrawals, consideration should be given to whether the tax cost of withdrawing funds is more than the potential IHT charge if they remain in the pension pot at death. For additional and higher rate taxpayers, there are no savings to be had by withdrawing funds in excess of the tax-free lump sum.

It is also important to remember that once a pension pot has been flexibly accessed, the ability to make further contributions is capped by the money purchase pension allowance (currently £10,000 a year) where this is less than earnings.

Consider the beneficiary

Before withdrawing pension funds to save IHT, it is important to assess who would benefit from those funds if they remained in the pension pot at death. If the beneficiary is a spouse or civil partner, the inter-spouse exemption would be in point and there would be no IHT to pay.

Consider the value of the estate

It is also important to consider the likely value of the death estate and whether it would be sheltered by the available nil rate bands and existing exemptions. If the estate (including any unused pension pots) would not be a chargeable estate, there is no IHT to save by withdrawing the funds.

Consider all tax charges

It is really important that the potential IHT saving is not looked at in isolation – all potential tax charges must be considered to assess whether there are overall savings to be had.

Once the tax-free lump sum has been withdrawn, further withdrawals will be taxed at the recipient’s marginal rate. If the amounts withdrawn exceed the personal allowance, there will be income tax to pay.

If the amounts are withdrawn (possibly triggering an income tax charge) and remain in the estate at death, the funds will be taken into account in working out the IHT charge on death – it does not matter whether they are inside the pension pot or not.

Consideration may be given to withdrawing funds and making lifetime transfers. Here it depends on how this is done. If a regular pension is withdrawn and the income is passed on, the gifts out of income exemption will apply as long as the donor has sufficient remaining income to live on. If tax is paid at less than 40% on the amounts withdrawn, there may be some tax savings.

If a lump sum is withdrawn and a capital sum is passed on, the donor will need to live for seven years from the date of the gift for the gift to fall out of charge for IHT purposes. Again, the Chancellor may change this rule.

There is no one correct answer – the best approach will depend on circumstances and may involve something of a gamble on what the Chancellor may reveal on 26 November.

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The 2025 Budget on 26 November 2025 is expected to be crucial for the long-term implications for the UK economy – announcements of tax increases are expected. It is also expected to include further detail confirming HMRC’s digital roll-out (particularly Making Tax Digital) plus further digital implementation in the form of e-invoicing.

E-invoicing has been in use in various forms for a number of years and, internationally, over 80 countries have e-invoicing mandates, with the EU planning an EU-wide requirement from July 2030. Within the UK, its use is voluntary for most businesses, although some larger corporations and those engaged in international trade have had to adopt e-invoicing systems. For example, e-invoicing is mandatory for transaction payments made to and from public entities (e.g. the NHS, government departments or local councils). HMRC is looking to expand and standardise such processing, eventually implementing a system whereby any business’s invoices are automatically submitted to HMRC.

The practicalities

E-invoices can be processed almost instantly, potentially leading to faster payment cycles. Under e-invoicing, invoices are usually in formats such as PDF, XML or JSON. The e-invoice is created by the supplier, the supplier’s software issues the e-invoice, the customer’s software receives and processes the e-invoice, and then the customer issues payment to the supplier. The result is a much faster, more accurate and more compliant invoicing cycle – often cutting days or even weeks from traditional payment timelines.

HMRC’s plan

The government’s aim is to standardise and broaden this system of e-invoicing across the private sector quoting ‘improved efficiency, accuracy, and transparency‘ as the benefits for adoption in a recent consultation document. The consultation invited contributors to give their opinion as to what form(s) of e-invoicing model would work, citing methods such as four-corner (supplier->software provider->buyer), centralised or data share models.

Different models

• Four-corner model: Each party (supplier and buyer) uses a certified software provider to exchange invoice data.

• Centralised model: Taxpayers transmit data to a certified third party enlisted by the tax authorities to act on their behalf. These third parties approve the submissions, time-stamping each transmission.

• Data sharing model: Taxpayers extract e-invoicing data from their accounting systems and transmit that information directly to HMRC in ‘real time’. Each invoice is digitally signed and assigned a unique tax stamp before being sent to the customer.

Practical implementation

HMRC views e-invoicing as an extension of Making Tax Digital and will probably implement the system on a voluntary basis initially. Those taxpayers currently submitting VAT returns will be least affected as they must submit VAT returns digitally already. Making Tax Digital is being rolled out gradually, with those self employed and landlords whose gross income exceeds £50,000 mandated into the system (unless specifically exempt) as from April 2026 and those taxpayers with gross income exceeding £30,000 in April 2027 The intention is to expand further to those taxpayers with gross income of more than £20,000 in April 2028.

Taxpayers who deal in cash transactions will be most affected as they will be required to generate a digital invoice via a mobile app (with or without a customer’s email), record the cash payment and ensure that the invoice is logged into their system, with the next step being transmission to HMRC.

Practical point

Reading the consultation, it would appear that HMRC is intending to mandate e-invoicing looking to build a data sharing feed to HMRC, believing that this will enable the tax authority to ‘simplify tax reporting, reduce error and support businesses to get their tax right’, thereby reducing what HMRC perceives as the ‘tax gap‘. Critics of the system fear that imposing e-invoicing mandates could create additional compliance burdens, particularly for small businesses.

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In the not-too-distant past, incorporation was synonymous with automatic tax savings. However, successive governments have eroded these tax benefits. With additional administration and costs, many directors are considering disincorporation. As ever, there are tax implications for both the company and individual.

Asset transfer

Whatever the reason for disincorporation, when a company with assets closes, HMRC generally treats the company as disposing of those assets to the directors at market value. For the company, this would usually crystallise either balancing charges or allowances. However, where there is a business succession between connected parties, a balancing charge or allowance can be avoided by making an election. The effect is for any actual or deemed disposal proceeds to be ignored and for the capital allowance pool to be transferred at its tax written-down value.

A valid election must be made jointly by the company and individual within two years of the date of succession. The succeeding business then includes the transferred closing written-down value as an addition in its opening capital allowance pool. No writing down allowances are given on the purchase of plant or machinery in the company’s final basis period, and a balancing adjustment is calculated.

Transferring stock

Similar to the transfer of assets, the transfer of stock is deemed to be at ‘market value’. However, it should be possible for the parties to make a joint election to transfer the stock at its actual transfer value (or, if higher, the book value).

Capital assets

A company that has been in business for a while may have built up a significant value of ‘goodwill’ when they decide to disincorporate. Goodwill is an asset that will be transferred to the new business along with any other ‘relevant’ assets (e.g. land and buildings). HMRC usually taxes such a transfer as a chargeable gain, again at market value as the transfer will take place between ‘connected parties’. However, unlike for assets subject to capital allowances, there are no reliefs available to defer or hold over any gains. As such, this tax charge is often the largest hidden tax cost in disincorporation.

Stamp duty land tax

If a property used by a company is transferred to someone connected to the company (e.g. a shareholder who becomes a sole trader), HMRC treats the transaction as if the individual bought at market value, even if no money changes hands. However, if a property is transferred as a distribution in specie (non-cash), this should be exempt from SDLT. This is provided that the property is not encumbered with a loan and the distribution does not give rise to the creation of a debt.

Where there is a third-party (non-shareholder) loan secured on the property, the transfer will attract SDLT where there is an assumption by the shareholder of liability for the debt.

VAT

As a general rule, when a trade ceases the VAT-registered entity is deemed to make a taxable supply of all goods held by the business. However, on a transfer from a company to sole trader, there should be no VAT charged by virtue of the ‘transfer of going concern’ provisions.

Withdrawing monies

There will be the usual considerations (i.e. tax rates and timing, etc.) when deciding how to withdraw any remaining cash from a solvent company, but the outcome will probably be a straight choice between taking a dividend or a capital distribution.

A capital distribution (only available on the company’s closure if the total amount paid to all shareholders is less than £25,000), will be subject to CGT taxed at either 18% or 24% for 2025/26, depending on the level of the shareholder’s income. Where the distributable amount exceeds £25,000, the shareholders pay income tax at the dividend tax rates, after taking into account the £500 dividend allowance (and any personal allowance, if available).

Practical point

Disincorporation can be a significant step, so it is advisable to consult professionals to ensure compliance and understanding of the implications.

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Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is mandatory from 6 April 2026 for self-employed traders and landlords whose combined gross trading and business income in 2024/25 is £50,000 or more. Those within MTD for ITSA must maintain digital records and submit quarterly updates and a final declaration to HMRC electronically using software compatible with MTD for ITSA.

As the name suggests, MTD for ITSA relies on digital record-keeping and communication. HMRC recognise that not everyone is able to operate in a digital world and those who they accept as being ‘digitally excluded’ can apply for an exemption from MTD for ITSA.

Meaning of ‘digitally excluded’

HMRC acknowledge that there are various reasons why a person may consider themselves digitally excluded. For example, a person may be digitally excluded because:

· their age, a health condition or a disability prevents them from using a tablet, computer or smartphone to keep digital records and to submit returns to HMRC;

· they are a practising member of a religious society or order whose beliefs are incompatible with using digital communications or keeping digital records and they do not use a computer, tablet or smartphone for business or personal use; or

· they cannot get internet access at their home or business because of their location, and they are unable to get access at a suitable alternative location.

However, HMRC will not accept an application for exemption from MTD for ITSA if the only reason for the application is one of the following:

· the person previously filed a paper tax return;

· the person is unfamiliar with accounting software;

· the person only has a small number of records to create each year; or

· the person will spend extra time or incur additional costs as a result of complying with MTD for ITSA.

Where a person has an existing exemption from MTD for VAT because they are digitally excluded, providing that the person’s circumstances have not changed, HMRC will accept that they are also exempt from MTD for ITSA.

Applying for an exemption

To apply for an exemption from MTD for ITSA on the grounds of digital exclusion, a person will need to write to HMRC ahead of their MTD for ITSA start date. They must provide the following information:

· their National Insurance number;

· their name and address;

· details of how they currently submit their returns (including the use of an agent or other person to submit them on their behalf);

· the reason that they think that they are digitally excluded, including information in support of their claim;

· whether they have an accountant or agent and what they do for them; and

· any additional needs that they have.

An application can be made by an agent on behalf of someone who is digitally excluded.

It should be noted that if a person is unable to use digital returns themselves, for example because of age or disability, but they have an agent or someone else who can keep digital records and file digital returns on their behalf, an exemption will not be forthcoming.

The application should be sent to:

Self Assessment
HM Revenue and Customs
BX9 1AS

Where a person is already exempt from MTD for VAT because they are digitally excluded, they will also need to write to HMRC to apply for an exemption from MTD for ITSA, providing their National Insurance number, their VAT registration number and the reason that they are digitally excluded from submitting their VAT returns using software that is compatible with MTD for VAT.

An agent can apply for an exemption on a client’s behalf.

Other exemptions

The following are automatically exempt from MTD for ITSA and are unable to sign up voluntarily:

· those completing a tax return as a trustee, including a trustee of a charitable trust or a non-registered pension scheme;

· a person who does not have a National Insurance number on 31 January before the start of the tax year;

· a person completing a tax return as the personal representative of someone who has died;

· a Lloyd’s underwriters in respect of their underwriting activity; and

· a non-resident company.

Anyone in the above groups does not need to apply for an exemption as it is automatic.

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Unfortunately, tenants (and their pets) may cause damage to a rental property. Where this is the case, the landlord may be left to repair the damage and pick up the bill. In this situation, can the landlord obtain tax relief for the costs incurred?

Nature of costs

The nature of the work will determine how and when tax relief is available.

Where repairing the damage merely restores the property to the state that it was in before the damage, the associated costs are revenue in nature and can be deducted in calculating the profits of the property rental business. This is the case regardless of whether the landlord prepares their accounts using the cash basis or the accruals basis.

In the event that the landlord needs to replace domestic items, such as furniture or white goods, tax relief for the cost of the replacement is given in accordance with the rules for replacement domestic items. Under these rules, relief is given for the cost of a like-for-like replacement, plus the costs of disposing of the old item and delivery and fitting of the new one. If the replacement is superior to the old item (allowing for technological advances), the deduction is capped at the cost of an equivalent replacement. If any disposal proceeds are received in respect of the old item, this too must be taken into account.

Where the repair is so significant as to constitute an improvement, for example, a significant upgrade to a kitchen after tenant damage, the costs will be capital rather than revenue. Here, relief is given through the capital gains tax system on the disposal of the property. For residential lets, plant and machinery capital allowances are not available.

Deposit recoveries

If the landlord recovers the cost of the damage from the tenant’s deposit, the amount recovered must be taken into account as a receipt when calculating the rental profit.

Insurance receipts

Likewise, if the landlord is able to recover the costs of damage caused by tenants under an insurance policy, the insurance receipts must be taken into account.

A director’s loan account is simply a means of keeping track of transactions between the director and the company of which they are a director. Where the company is a personal or family company, the director may borrow from the company or lend money to the company. Similarly, the director may meet expenses of the company, or the company may pay the director’s personal bills. These transactions are recorded in the director’s loan account. Dividend or salary payments may also be credited to the account.

If the director’s account is overdrawn at the end of the company’s accounting period or at any point during the tax year, there may be tax implications to address.

Close companies

If the company is close, as personal companies and most family companies are, there will be tax consequences for the company if the director’s account is overdrawn at the company’s year end. Broadly, a close company is one that is under the control of five or fewer participators or any number of participators if those participators are directors. A participator is someone who has an interest in the capital or income of the company.

The action that the company needs to take in respect of an overdrawn director’s loan account depends on whether the account is still overdrawn at the corporation tax due date, which is nine months and one day after the end of the accounting period.

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If the loan has been repaid within this time frame, the company must disclose the loan on form CT600A when they prepare their corporation tax return, notifying HMRC of the amount that was outstanding at the end of the accounting period and the date(s) on which the repayments were made.

If the account remains overdrawn at the corporation tax due date, the company must pay section 455 tax on the outstanding loan balance along with their corporation tax. Anti-avoidance provisions exist to prevent the loan being repaid and then reborrowed in a bid to avoid the section 455 charge.

Section 455 tax

The company must pay section 455 tax on the amount by which the director’s account remains overdrawn nine months and one day after the company year end. The rate of section 455 tax is aligned with the upper dividend rate (currently 33.75%). The tax is paid with the corporation tax but crucially is not corporation tax.

Section 455 tax is a temporary tax in that it is repayable nine months and one day after the end of the accounting period in which the loan is repaid.

Clearing the loan, whether by an injection of cash, declaring a dividend or by paying a bonus, will prevent a section 455 liability from arising. However, this will not always be the best option. If the loan is cleared by a dividend or a bonus, this will trigger tax and (in the case of a bonus) National Insurance liabilities which may be greater than the section 455 tax. It may be cheaper to pay the section 455 tax and to clear the loan at a later date when it can be done more tax efficiently.

Benefit in kind charge

If the loan balance exceeds £10,000 at any time in the tax year, a tax charge will arise under the benefit in kind provisions by reference to the difference between interest on the loan at the official rate and that paid by the director (if any). The employer will also pay Class 1A National Insurance on the taxable amount.

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will apply from 6 April 2026 to sole traders and unincorporated landlords with combined trading and property income in 2024/25 of at least £50,000.

Under MTD for ITSA, traders and landlords must keep digital records and make digital returns to HMRC using MTD-compatible software.

A digital record is a record of income and expenses that is created and stored in software that works with MTD for ITSA. Under MTD for ITSA, a trader must keep digital records of their trading income and expenses, and an unincorporated landlord must keep digital records of their property income and expenses. If a trader or landlord has other income, there is no need for them to keep records of that income digitally.

Software

Traders and landlords within MTD for ITSA will need to use software that either creates digital records and submits information to HMRC or software which connects to the trader or landlord’s own record-keeping software, such as a spreadsheet. This type of software is known as bridging software.

Taxpayers can choose a single product that meets all their needs or a number of products that work together. Where more than one product is used, they must link digitally. For example, it is acceptable to keep records in a spreadsheet which is linked digitally to software to submit information to HMRC. However, it is not acceptable to manually enter or cut and paste data from a spreadsheet into a software package.

Records that must be kept digitally

The following records must be kept digitally:

· self-employment income, such as sales, takings and fees;

· self-employment expenses, such as the cost of goods, travel costs, office costs, rent, etc.;

· property income, such as rent, lease premiums, reverse premiums and inducements; and

· property expenses, such as repairs, maintenance, travel, etc.

The amount, the date the income was received or payment made and the nature of the income or expense should be recorded. The income and expenditure categories for MTD for ITSA are the same as for the Self-Assessment tax return.

If a trader has more than one business, they will need to keep the details for each business separately and make separate quarterly returns for each business. Landlords should keep separate records for their UK and foreign property businesses.

Jointly let properties

Where a landlord has income from a jointly let property, they only need to keep digital records relating to their share of the income and expenses. Landlords with income from jointly let properties can opt to keep less detailed records or to exclude income from jointly let properties in their quarterly updates; the income is instead included when the position for the tax year is finalised.

Turnover below the VAT threshold

If a trader’s turnover from a single self-employment is £90,000 or less, they only need to record whether a transaction is income or an expense. More detail is not required.

Landlords with income from residential letting need to record whether a transaction is an income or an expense and, where it is an expense, whether it is a restricted finance cost.

Once income reaches £90,000, transactions must be fully categorised.

Retailers

Retailers can create a digital record of gross daily takings rather than having to record each individual sale.

Storing digital records

Digital records must be kept for at least five years from the 31 January submission date for the tax year in question, i.e. for 2026/27, until 31 January 2033.

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The rate at which a company pays corporation tax depends on the level of its taxable profits. Where a company’s profits are below the lower profits limit, corporation tax is charged on all profits at the rate of 19% and where a company’s profits are more than the upper profits limit, they are all taxed at the rate of 25%. However, where the profit falls between these limits, corporation tax is charged at the rate of 25% and reduced by marginal relief. The effect of this is to provide a gradual increase in the rate of corporation tax from the small profits rate to the main rate.

For the financial years 2024 and 2025, the lower profits limit is £50,000 and the upper profits limit is £250,000. Where a company has one or more associated companies, these limits are divided by the number of associated companies plus one, so if a company has one associate, the limits are, respectively, £25,000 and £125,000. The limits are also proportionately reduced where the accounting period is less than 12 months.

Marginal relief is calculated by reference to the following formula:

F x (U – A) x N/A

Where:

F is the marginal relief fraction;

U is the upper profits limit;

A is the augmented profits for the accounting period; and

N is the total taxable profits for the accounting period.

The marginal relief fraction for the financial year 2025 is 3/200, unchanged from the financial year 2024.

Augmented profits are the company’s total taxable profits plus qualifying exempt distributions received by the company which are not excluded. Qualifying exempt distributions include dividends, distributions of assets, amounts treated as a distribution on the transfer of assets and liabilities and bonus issues following a repayment of share capital. Distributions are excluded from the calculation of augmented profits if they are from a 51% subsidiary, a company of which the recipient is a 51% subsidiary or a trading company or relevant holding company that is a quasi-subsidiary of the recipient.

If the company has no qualifying exempt distributions to take into account, augmented profits are the same as taxable profits and the formula can be simplified to F x (U – A).

To make things easier, HMRC have produced a tool which can be used to work out marginal relief. This can be found on the Gov.uk website at www.tax.service.gov.uk/marginal-relief-calculator.

Example

A Ltd prepares accounts to 31 March each year. For the year to 31 March 2025, it had taxable profits of £80,000. It does not receive any qualifying exempt distributions. Consequently, its augmented profits are also £80,000.

The company’s marginal relief is calculated as follows:

3/200 x (£250,000 – £80,000) x 1 = £2,550.

At the main rate, the company would pay corporation tax of £20,000 on its profits (£80,000 x 25%).

The company’s corporation tax bill is therefore £17,450, being corporation tax at the main rate of 25% (£20,000) as reduced by the marginal relief of £2,550.

The company’s effective rate of corporation tax is 21.81%.

A taxpayer may have grounds for appealing a penalty if they have a reasonable excuse for missing a filing or payment deadline. However, it is important to realise that the appeal will only succeed if HMRC accept that the excuse is indeed reasonable. In this regard, the bar is set high.

The first point to note is that there is no statutory definition of ‘reasonable excuse’. Whether a person has a reasonable excuse depends on the circumstances in which the failure to meet the obligation occurred, as well as the circumstances and the abilities of the person who failed to meet the obligation. Consequently, what might be a reasonable excuse for one person may not be a reasonable excuse for someone else.

HMRC’s approach

In determining whether an excuse is ‘reasonable’, HMRC’s approach is to look at what a reasonable person with the same attributes and abilities who wanted to comply with their tax obligations would have done in the same circumstances. A reasonable excuse is one that stops a taxpayer from meeting their obligations for a valid reason. In guidance published on the Gov.uk website, HMRC provide the following examples of reasons for a failure to comply which may be accepted as constituting a reasonable excuse:

• The taxpayer’s partner or a close relative died shortly before the tax return or payment deadline.

• The taxpayer had an unexpected stay in hospital which prevented them from dealing with their tax affairs.

• The taxpayer had a serious or life-threatening illness.

• The taxpayer’s computer or software failed while they were preparing their return online.

• The taxpayer experienced issues with HMRC’s online services.

• The taxpayer was prevented from completing their tax return because of a flood, a fire or a theft.

• The deadline was missed due to postal delays which the taxpayer could not have predicted.

• The delay related to a disability or a mental illness which the taxpayer has.

• The taxpayer was unaware of or misunderstood their legal obligations.

• The taxpayer relied on someone else to do their return and they failed to do so.

Where the taxpayer has a reasonable excuse for missing a filing deadline or making a payment, they should rectify this as soon as they are able.

Unacceptable excuses

Like ‘the dog ate my homework’, HMRC do not accept the following excuses as providing a valid reason for missing a filing deadline or failing to make a payment on time:

• A cheque or payment bouncing because the taxpayer did not have enough money in their account.

• Finding the HMRC system too difficult to use.

• Missing the deadline because a reminder was not received from HMRC.

• A mistake was made on the tax return.

Corporate landlords will not be hit by the property tax rises that will apply to unincorporated landlords from 6 April 2027; they will continue to pay corporation tax on their rental profits, the rates of which are unchanged. However, this does not mean that their shareholders are immune from the Budget tax rises. Where profits are extracted from a property company in the form of dividends, the recipient shareholders will be affected by the increases in the dividend tax rates applying from 6 April 2026.

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One of the key requirements under Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is the need to keep digital records of income and expenses. A digital record is a record of income or an expense that is created and stored using software that is compatible with MTD for ITSA.

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A new 40% first-year allowance (FYA) is to be introduced from April 2026. It will apply to main rate expenditure on new assets, excluding cars. Both companies and unincorporated business will be able to benefit. The new allowance will be available from 1 January2026 for corporation tax and from 6 January 2026 for income tax.

From 1 April 2026 for corporation tax and 6 April 2026 for income tax the main rate of writing down allowance (WDA) is reduced from 18% to 14%. A hybrid rate will apply where the chargeable period spans the date of the rate change.

Utilising the new allowance

Companies have a range of options for relieving main rate expenditure in the year in which it is incurred. The annual investment allowance (AIA) provides immediate relief for qualifying expenditure on new and used assets and applies to both qualifying main rate and special rate expenditure. However, it is subject to an annual limit of £1 million.

Companies can also take advantage of full expensing to deduct qualifying expenditure on new main rate assets. Full expensing is available without limit.

Like full expensing, the new 40% FYA applies to qualifying expenditure on new main rate assets. As full expensing can be used without limit, the 40% FYA will only be of use to a company where the expenditure is outside full expensing. This will be the case, for example, for assets used for leasing.

The new 40% FYA is also available to unincorporated businesses.

The cash basis is the default basis of accounts preparation for traders. It allows capital expenditure to be deducted when computing profits unless the expenditure is of a type for which such a deduction is specifically prohibited. Cars fall into this category. Where a deduction is not allowed, capital allowances can be claimed (unless simplified expenses have been used to claim relief for mileage costs).

Capital allowances are of more relevance where the trader uses the accruals basis. Unincorporated businesses can access the AIA, but do not benefit from full expensing. The new 40% FYA will be useful to them where the AIA has been used up, and also where expenditure qualifies for the new 40% FYA but not the AIA.

Where the 40% FYA is claimed, the balance of the expenditure is relieved by main rate WDAs.

Reduction in the WDA

The rate of WDA on main rate expenditure drops from 18% to 14% from 1 or 6 April 2026. This will lengthen the period over which relief is given for expenditure on main rate assets. It will have an impact where the business opted not to claim the AIA or full expensing on qualifying main rate expenditure or, from January2026, where the new 40% FYA is claimed.

Cars, other than new zero emission cars, are not eligible for any of the FYAs. Low emission cars are allocated to the main pool. The reduction in the main rate WDA will mean that it will take businesses longer to fully relieve the cost of main rate cars than is currently the case.

Where the chargeable period spans the date on which the rate changes, a hybrid rate will apply. This will reflect the number of days in the chargeable period before the rate change and the number of days on or after the rate change. For example, where a company prepares accounts to 30 June, the hybrid rate for the period to 30 June 2026 is 17%.

Unincorporated landlords who had combined property and trading income in 2024/25 of £50,000 or more must comply with Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) from 6 April 2026. This requires them to keep digital records and make quarterly returns and a final declaration to HMRC using MTD-compatible software.

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All things being equal, receiving a pay rise which takes your income over £100,000 would be seen as a cause for celebration. However, all things are not equal, and as press reports attest, some people would rather turn down a promotion or cut their hours than take their earnings over £100,000.

We explain why this is.

Reason 1 – loss of the personal allowance

Individuals have a personal allowance of £12,570, allowing them to earn £12,570 before they pay tax. However, once their income exceeds the personal allowance income limit, their personal allowance starts to reduce. The personal allowance income limit is £100,000, unchanged since its introduction.

Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. A person with adjusted net income of £110,000 will only receive a personal allowance of £7,570 (£12,570 – ((£110,000 – £100,000)/2)).

Once a person’s adjusted net income reaches £125,140, their personal allowance is lost entirely so that they pay tax from the first pound that they earn.

The combined effect of the loss of the personal allowance and paying tax at the higher rate of 40% means that the marginal rate of tax between £100,000 and £125,140 is 60%. Add to that National Insurance of 2% and possibly student loan deductions of 9% or 15% and maybe pension contributions, the taxpayer does not actually keep much of the money that they earn between £100,000 and £125,140. Easy to see why some may deem the extra hours or workload as not being worthwhile.

Once income reaches £125,140, the marginal tax rate drops to 45% (the additional rate).

Reason 2 – loss of free childcare and tax-free top-up

Working parents may be able to receive free childcare for children from the age of nine months to four years for 30 hours a week for 38 weeks of the year. This is valuable. However, it is only available as long as neither partner has adjusted net income of more than t£100,000. Thus, once income reaches £100,000, free childcare is lost.

Working parents may also be able to benefit from the Government’s tax-free childcare scheme which provides up to £2,000 a year towards childcare costs (and up to £4,000 a year if the child is disabled). Under the scheme, the Government provides a £2 tax-free top-up for every £8 that the parents deposit in a dedicated account, up to the £2,000/£4,000 maximum top-up. However, as with free childcare, tax-free childcare is not available where either partner earns £100,000 or more.

For parents with young children, earning £100,000 or more will significantly increase their childcare costs.

Beating the system

There is a way to have the benefit of earning more than £100,000 a year and keeping your personal allowance, free childcare and the tax-free top-up. This is by making personal pension contributions to reduce your adjusted net income to below £100,000. You will still get the benefit of the money eventually, while retaining the personal allowance and childcare benefits.

The more altruistic can make charitable donations to reduce adjusted net income to below £100,000, which works in the same way.

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During the Chancellor’s Budget speech, savers received the unwelcome news that the rate of tax on savings income is to increase and the cash ISA limit to fall. Both changes will take effect from 6 April 2027.

Taxation of savings income

The taxation of savings income is quite complex as a number of factors come into play.

The first complication is the personal savings allowance, which is available to some taxpayers but not all. Basic rate taxpayers have a personal savings allowance of £1,000, whereas for higher rate taxpayers, the allowance is only £500. Additional rate taxpayers do not receive a personal savings allowance. Where available, the personal savings allowance is in addition to the personal allowance.

The second complication is the savings starting rate band. The savings starting rate of tax of 0% applies to savings income within the savings starting rate band. This is set at £5,000. However, if the taxpayer has non-savings income in excess of their personal allowance, the savings starting rate band is reduced pound for pound. Individuals with taxable non-savings income of £5,000 and above do not benefit from the savings starting rate band.

Where an individual has savings income that is not sheltered by the personal allowance or the personal savings allowance and which does not benefit from the savings starting rate, it is currently taxed at the normal income tax rates, i.e. 20% where it falls in the basic rate band, 40% where it falls within the higher rate band and at 45% where it falls in the additional rate band.

However, this is to change. From 6 April 2027, savings income will be taxed at the relevant savings tax rate. The rates will be two percentage points higher than the standard income tax rates. Consequently, for 2027/28, savings income will be taxed at 22% where it falls in the basic rate band, at 42% where it falls in the higher rate band and at 47% where it falls in the additional rate band.

In a further twist, the income tax ordering rules are also changed from 6 April 2027, moving away from the principle that reliefs and allowances are allocated so as to give the lowest tax bill. From that date, the personal allowance will be allocated first against employment income, trading and pension income, rather than against savings and property income which are taxable at a higher rate.

Cash ISAs

Savers are advised to make use of their cash ISA allowance to keep interest on savings tax-free. With the rise in the savings tax rates from 6 April 2027, using the cash ISA allowance will generate greater tax savings.

However, for those who prefer to keep their savings in cash rather than investing in stocks and shares, there is more bad news. From 6 April 2027, savers under 65 will only be able to invest £12,000 a year in a cash ISA; the ISA limit is to remain at £20,000, but for under 65s using their full allowance, at least £8,000 of that must be invested in a stocks and shares ISA. However, savers aged 65 and over can invest the full £20,000 in a cash ISA.

Existing ISAs are unaffected by the change.

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In her tax-raising Budget on 26 November 2025, the Chancellor announced that the dividend ordinary rate and the dividend upper rate are to rise by two percentage points from 6 April 2026. This will affect director/shareholders in personal and family companies who extract profits in the form of dividends.

How dividends are taxed

Dividends have their own tax rates, which are lower than the standard income tax rates. Dividend income which is not sheltered by the personal allowance or the dividend allowance is treated as the top slice of income. It is taxed at the dividend ordinary rate where it falls in the basic rate band, at the dividend upper rate where it falls in the higher rate band and at the dividend additional rate where it falls in the additional rate band.

For 2025/26, the dividend ordinary rate is 8.75%, the dividend upper rate is 33.75% and the dividend additional rate is 39.35%.

From 6 April 2026, the dividend ordinary rate rises to 10.75% and the dividend upper rate rises to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

All individuals are entitled to a dividend allowance, which is £500 for 2025/26 and remains at this level for 2026/27. The dividend allowance acts as a nil rate band; dividends sheltered by the allowance are tax-free. However, it uses up part of the band in which it falls.

Impact of the rise

Where profits are extracted as dividends and the shareholder is a basic or higher rate taxpayer, they will pay an additional £20 in tax on every £1,000 of dividends paid in 2026/27 as compared to 2025/26. A shareholder taking £50,000 of dividends a year will pay an additional £1,000 in tax.

Additional rate taxpayers are unaffected by the change.

Beating the rise

Where a personal or family company has retained profits, consideration should be given to paying dividends before 6 April 2026 if the tax hit will be lower than if the dividend is paid on or after that date. However, if dividends have already been paid to use up the basic rate band, there is no point paying a dividend if it would be taxed at the dividend upper rate if paid before 6 April 2026 and at the dividend ordinary rate if paid on or after that date; 10.75% is lower than 33.75%.

In a family company scenario with an alphabet share structure, to minimise the total tax paid on profits extracted as dividends, make sure shareholders’ dividend allowances and basic rate bands are used up before paying dividends taxable at the higher rates.

Consideration could also be given to extracting profits in other ways, such as employer pension contributions or tax-free benefits in kind.

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The liability for self-employed earners to pay Class 2 National Insurance contributions was abolished with effect from 6 April 2024. Now Class 2 National Insurance is a voluntary charge which self-employed earners with profits below the small profits threshold can choose to pay to secure a qualifying year for state pension and benefit purposes. Where a self-employed earner has profits in excess of the small profits threshold, they receive a National Insurance credit if their profits are between the small profits threshold and the lower profits threshold. If their profits exceed the lower profits limit, they will pay Class 4 contributions.

For 2024/25, Class 2 contributions are only payable where a self-employed earner has profits below the small profits threshold (which for 2024/25 is £6,725) and they have opted to pay Class 2 voluntarily. For 2024/25, voluntary Class 2 contributions are payable at the rate of £3.45 per week; an annual liability of £179.40.

The problem

Some self-employed taxpayers have been charged Class 2 National Insurance contributions for 2024/25 in error. The nature of the error depends on their particular circumstances. Some self-employed earners with profits in excess of the lower profits limit (set at £12,570 for 2024/25) have had a Class 2 National Insurance charge of £358.80 added to their account. This is twice the voluntary Class 2 charge for 2024/25. Self-employed earners with profits in excess of £12,570 are liable to pay Class 4 National Insurance on their profits only.

In some cases, the amount added in error is less than £358.80.

Resolving the issue

HMRC have stated that they have taken action to correct the error where the information that they hold has enabled them to do so. Some self-employed taxpayers have also reported that their Self Assessment calculation (SA302) has been amended to revert to the correct liability initially reported on their 2024/25 Self Assessment tax return.

However, incorrect Class 2 National Insurance letters will continue to be sent out until HMRC have resolved the IT issue in September. Once the problem has been resolved, HMRC will correct the remaining accounts showing a Class 2 National Insurance charge in error. Those affected will be notified when this has been done.

Where a payment has already been made in respect of the incorrect Class 2 National Insurance charge, it will either be refunded or a credit will be added to the taxpayer’s Self Assessment account.

Taxpayers have until 31 January 2026 to submit their 2024/25 Self Assessment tax return. Self-employed taxpayers who have yet to submit their return may wish to wait until this issue is resolved before doing so. Where the return has already been submitted, check the calculation and if it is wrong, make sure HMRC correct it.

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A VAT invoice is an invoice that contains information required by the VAT regulations. A VAT invoice can only be issued by a business which is registered for VAT. Where a business is VAT registered, they must issue a VAT invoice whenever they supply goods or services that are liable to the standard rate of VAT or a reduced rate to another taxable person. A VAT invoice must normally be issued within 30 days of the date on which the supply was made.

VAT invoices are important and the business must keep a copy of every VAT invoice that they issue. Likewise, they must keep a copy of every VAT invoice that they receive. VAT invoices are the primary evidence of VAT charged and VAT incurred.

Details that must be included

Every VAT invoice issued must include the following information:

• a sequential number based on one or more series that uniquely identifies the document;

• the time of supply;

• the date of issue of the document (where this is different from the time of supply);

• the name, address and VAT registration number of the supplier;

• the name and address of the person to whom the goods or services are supplied;

• a description sufficient to identify the goods or services supplied;

• for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency;

• the gross total amount payable, excluding VAT, expressed in any currency;

• the rate of any cash discount offered;

• the total amount of VAT chargeable, expressed in sterling; and

• the unit price.

It should be noted that different rules apply where a margin scheme is used and the business should follow the rules of the scheme.

Where a business based in Northern Ireland sends an invoice to a person in an EU member state, the VAT invoice must also include the letters ‘GB’ in front of the VAT registration number for cross-border supplies, the registration number of the recipient preceded by the alphabetical code for the relevant EU member state and a reference to the means of transport.

Electronic invoices

VAT invoices may be issued electronically, and electronic invoices offer a number of advantages over paper invoices. Electronic invoicing is the transmission and storage of invoices in an electronic format without duplicate paper invoices.

The information set out above in relation to paper invoices must also be contained in electronic invoices. However, when sending batches of invoices to the same customer, information that is common to the individual batches may be recorded once per batch rather than on each invoice. For example, the customer’s full name could be included on the batch header rather than on each individual invoice.

Retail invoices

There is no requirement to issue a VAT invoice for retail supplies to unregistered businesses. If asked for a VAT invoice and the supply is £250 or less, a simplified VAT invoice can be issued. However, if the supply is more than £250, a full VAT invoice must be provided if requested.

Simplified invoice

A simplified invoice can be issued if the supply is £250 or less showing the supplier’s name, address and VAT registration number, the time of supply, a description of the goods or services and the VAT rate charged for each, the total amount payable including the VAT shown in sterling and the VAT rate charged. Exempt supplies should not be included in a simplified invoice.

Where the value of the supply is more than £250, a full VAT invoice must be issued.

Credit notes

Where a credit note is issued, it must include the same information as the original invoice and sufficient information to identify the original invoice.

Currency

Although the invoice amounts may be expressed in any currency, where there is a positive rate of VAT due in the UK, the total amount of VAT must be expressed in sterling.

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There are various ways in which profits can be extracted from a personal or family company. A popular and tax-efficient extraction strategy is to pay a small salary and to extract further profits as dividends as long as the company has sufficient retained profits.

One of the advantages of paying a salary is to secure a qualifying year for state pension and benefit purposes. A person needs 35 qualifying years when they reach state pension age to receive a full state pension and at least ten qualifying years to receive a reduced state pension. If the director does not yet have 35 qualifying years, it is worth paying a salary which is sufficient for the year to be a qualifying year.

A year will be a qualifying year if an individual has qualifying earnings subject to National Insurance that are at least 52 times the lower earnings limit. Payments of salary and bonus are liable to Class 1 National Insurance. By contrast, dividends do not attract National Insurance.

For 2025/26, the lower earnings limit is set at £125 per week. Thus, it is necessary to pay a salary or bonus of at least £6,500 (52 x £125) for the year to be a qualifying year.

Where earnings are between the lower earnings limit and the primary threshold, which for 2025/26 is aligned with the personal allowance at £12,570, primary contributions are payable at a notional zero rate. This means that the director or employee benefits from a qualifying year for state pension purposes without having to actually pay any primary Class 1 National Insurance contributions.

However, the same is not true for the employer. The reduction in the secondary threshold to £5,000 from 6 April 2025 means that the secondary threshold is now below the lower earnings limit and, unless the employment allowance is available to shelter employer contributions, paying a salary equal to the lower earnings limit will come with a secondary Class 1 National Insurance bill.

Personal companies where the sole employee paid above the secondary threshold is also a director do not benefit from the employment allowance. Consequently, where a salary is paid which is of a level which is sufficient for a year to be a qualifying year for state pension purposes, secondary contributions will be payable. On a salary of £6,500 (the minimum needed for a qualifying year), the associated secondary Class 1 National Insurance bill will be £225 (15% (£6,500 – £5,000)).

In a family company where the employment allowance is available, it is possible to pay a salary which is sufficient to secure a qualifying year without an associated secondary Class 1 liability.

Although it is only necessary to pay a salary of £6,500 for the year to be a qualifying year for state pension purposes, if the personal allowance is available in full, it is more tax efficient to pay a salary of £12,570, as the corporation tax deduction on the salary and secondary Class 1 National Insurance will outweigh the secondary Class 1 National Insurance bill.

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