5 Major UK Tax Changes Hitting Your Finances In 2026: The New IHT, Dividend, And Business Rules Explained
The UK tax landscape is undergoing a significant overhaul, with April 2026 marking the implementation of several major policy shifts that will directly impact high-net-worth individuals, business owners, and investors. While the Personal Allowance freeze continues to quietly erode household wealth through "fiscal drag," a series of newly legislated changes are set to dramatically alter the rules for inherited wealth, investment income, and corporate asset depreciation. This in-depth guide, updated for the current date of December 22, 2025, details the five most critical tax changes you need to understand and plan for before the 2026/2027 tax year begins.
The government's focus for the 2026 tax year appears to be on closing perceived loopholes and increasing revenue from specific asset classes, particularly in the areas of inherited wealth and investment profits. Understanding these imminent changes is not just about compliance; it is about proactive financial planning to mitigate unexpected tax liabilities and ensure your wealth is structured efficiently for the years ahead.
The Five Most Critical UK Tax Changes Taking Effect in April 2026
The 2026/2027 tax year will introduce a new financial reality for many UK taxpayers. These changes are confirmed and represent a significant shift from previous decades of tax policy, moving beyond simple rate adjustments to fundamentally alter key reliefs and allowances.
1. Radical £1 Million Cap on Inheritance Tax (IHT) Reliefs
One of the most profound changes is the introduction of a cap on two crucial Inheritance Tax reliefs: Agricultural Property Relief (APR) and Business Property Relief (BPR).
- The New Cap: From 6 April 2026, the combined value of assets eligible for 100% APR and BPR will be capped at £1 million per individual.
- Impact on Estates: This change will dramatically affect owners of large farms, trading businesses, and certain unlisted company shares. Previously, these assets could pass on death entirely free of IHT, regardless of value, provided all conditions were met.
- What This Means: For a business or farm valued at £5 million, the first £1 million will still receive 100% relief, but the remaining £4 million will now be subject to IHT at the standard 40% rate (unless other exemptions apply). This represents a significant tax liability increase for many rural and entrepreneurial families.
- Planning Entity: Estate Planning, Business Succession.
This is arguably the biggest shift in UK Inheritance Tax in decades and necessitates an immediate review of wills, trust structures, and business ownership models to prepare for the new liability.
2. Dividend Tax Rates Increase by 2%
Investors who receive income from company shares outside of tax-advantaged wrappers like ISAs will face a higher tax bill starting in 2026. This measure targets passive income and will particularly affect company directors who pay themselves via dividends.
- The Rate Hike: Dividend tax rates will increase by two percentage points (2%) across the board for basic and higher-rate taxpayers from the 2026/2027 tax year.
- Frozen Allowance: Crucially, the tax-free Dividend Allowance remains at a low £500, meaning more of your dividend income is pushed into the higher tax brackets.
- New Dividend Tax Rates (Expected):
- Basic Rate: Rises from 8.75% to 10.75%
- Higher Rate: Rises from 33.75% to 35.75%
- Additional Rate: Rises from 39.35% to 41.35%
- Planning Entity: Investment Strategy, Owner-Managed Businesses, Share Portfolios.
This increase, combined with the low allowance, reinforces the importance of maximising ISA and pension contributions to shelter investment growth and income from the rising tax burden.
3. Carried Interest to be Taxed as Income
The UK government is moving to fundamentally change how "carried interest"—the share of profits received by investment fund managers (such as private equity and venture capital)—is taxed.
- The Shift: From April 2026, the government plans to bring carried interest fully within the income tax regime.
- Previous Treatment: Historically, carried interest has often been taxed as Capital Gains Tax (CGT), which has a lower top rate (currently 20% for most assets) than the top rate of Income Tax (currently 45%).
- The New Impact: By treating it as income, the top rate of tax applied to carried interest could effectively double for the highest earners, moving from 20% CGT to 45% Income Tax. This is a major revenue-raising measure and a significant change for the UK's financial services sector.
- Planning Entity: Private Equity, Venture Capital, Hedge Funds, Financial Services.
This move is aimed at ensuring that the profits of high-earning fund managers are taxed more in line with standard employment income, a policy that has been debated for years and is now set for implementation.
4. Reduction in Corporation Tax Writing-Down Allowances (WDAs)
While the main Corporation Tax rate is confirmed to remain at 25% for the financial year beginning 1 April 2026, a less-publicised but significant change affects how businesses can deduct the cost of assets.
- WDA Reduction: From 1 April 2026, the main rate for writing-down allowances (WDAs) will be reduced from 18% to 14%.
- What are WDAs? These are the annual deductions a company can claim for the depreciation of its assets, such as machinery, equipment, and fixtures. A lower WDA rate means that a company takes longer to fully deduct the cost of an asset against its profits.
- Cash Flow Impact: This change slows down the tax relief on capital expenditure, effectively increasing the tax burden on companies that invest heavily in plant and machinery, thereby impacting business cash flow and investment incentives.
- Planning Entity: Capital Expenditure, Business Investment, Corporate Tax Planning.
The small profits rate for companies with profits under £50,000 will, however, remain at 19%.
5. The Continuing Impact of the Personal Allowance Freeze
Although not a "new" change for 2026, the continuation of the freeze on Income Tax thresholds is arguably the most pervasive tax-raising measure affecting the majority of the UK population.
- Thresholds Frozen: The Personal Allowance (£12,570) and the Higher Rate Threshold (HRT) are frozen in cash terms. While initially set to end in 2026, the freeze has been extended and is now legislated to continue until April 2028, and potentially even longer.
- The Mechanism: As wages increase with inflation (wage inflation), more people cross the £12,570 Personal Allowance threshold and start paying tax, or cross the HRT and start paying the 40% higher rate.
- Fiscal Drag: This phenomenon, known as "fiscal drag," pulls millions of taxpayers into higher tax brackets without any active increase in tax rates. It is a stealth tax that raises billions for the Treasury.
- The Result: By the end of the freeze period, millions of people will be paying income tax who would not have done so if the thresholds had risen with inflation, and many more will be paying the higher rate.
- Planning Entity: All UK Earners, Pensioners, Household Budgeting.
Preparing for the 2026/2027 Tax Year: Actionable Strategies
The combination of these specific changes and the continuing fiscal drag requires a proactive approach to financial management. The time to act is now, well before the new rules come into force in April 2026.
Strategy 1: Review Inheritance Tax Planning Immediately
If your estate includes substantial business or agricultural assets, the new £1 million cap on BPR and APR is a game-changer. Consider:
- Lifetime Gifting: Utilise the Potentially Exempt Transfer (PET) rules to gift assets out of your estate, starting the seven-year clock before the new cap takes effect.
- Trusts: Review existing Will Trusts and lifetime trusts to ensure they are still the most tax-efficient structure under the new IHT rules.
- Asset Reclassification: Ensure business assets are definitively classified as "trading" rather than "investment" assets to maximise eligibility for the remaining BPR.
Strategy 2: Maximise Tax-Advantaged Investments
With the Dividend Tax rate rising and the Personal Allowance frozen, sheltering income and gains is more important than ever. Entities to maximise include:
- ISAs (Individual Savings Accounts): Maximise annual contributions to keep dividend income and capital gains entirely tax-free.
- Pensions: Use your annual pension allowance to receive tax relief at your marginal rate and shelter investment growth from future tax hikes.
- Venture Capital Schemes: Explore investments under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), which offer significant Income Tax and Capital Gains Tax reliefs.
Strategy 3: Business Investment Timing
For companies, the reduction in Writing-Down Allowances makes the timing of major capital expenditure critical. Consider accelerating planned purchases of plant and machinery into the current tax year (2025/2026) to benefit from the higher 18% WDA rate before it drops to 14% in April 2026. This also allows for the continued use of the generous Full Expensing relief where applicable.
Strategy 4: Child Benefit and Poverty Relief
On a positive note, the removal of the two-child limit from April 2026 is a significant measure aimed at reducing child poverty, lifting an estimated 450,000 children out of poverty. Families currently affected by this limit should factor this change into their future financial planning and benefit calculations.
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