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The 5 Biggest UK Tax Changes Coming In 2026: A Full Guide To IHT, MTD ITSA, And CGT Shocks

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The UK tax landscape is set for one of its most significant shake-ups in a generation, with a raft of confirmed changes scheduled to take effect from the start of the 2026/2027 tax year. As of today, December 19, 2025, the government has locked in several major policy shifts that will dramatically impact high-net-worth individuals, business owners, landlords, and even standard PAYE earners through the insidious effect of 'fiscal drag'. These are not mere technical adjustments; they represent fundamental changes to how wealth is transferred, how small businesses report income, and the effective tax rate on investments.

The core intention behind many of these reforms is to broaden the tax base and generate substantial revenue, often by capping long-standing reliefs or modernising compliance. Key areas of focus include Inheritance Tax (IHT) reliefs, the mandatory digital reporting for self-assessment, and a notable increase in Capital Gains Tax (CGT) for certain assets. Understanding these confirmed changes now is critical for effective financial planning, as strategies that worked in 2025 will be obsolete by April 2026.

The Wealth Tax Shock: Inheritance Tax (IHT) and Capital Gains Tax (CGT) Reforms

The 2026 tax year is set to deliver a significant blow to wealth preservation, primarily through two major, confirmed reforms targeting Inheritance Tax (IHT) and Capital Gains Tax (CGT). These changes will require immediate action for anyone with substantial business or agricultural assets.

1. The £1 Million Cap on IHT Reliefs: A Game-Changer for Business Owners and Farmers

The most profound change in wealth transfer planning is the introduction of a new cap on two of the most valuable Inheritance Tax reliefs: Agricultural Property Relief (APR) and Business Property Relief (BPR). For decades, these reliefs have allowed the value of qualifying business and agricultural property to be passed on free of IHT, often without limit.

From 6 April 2026, a new cap of £1 million will be applied to the combined value of assets eligible for 100% BPR and APR. This represents a monumental shift for family-owned businesses, farms, and high-net-worth individuals whose estates rely on these reliefs to avoid the standard 40% IHT charge. Assets valued above the £1 million threshold will now be subject to the full Inheritance Tax rate unless other exemptions apply.

  • Impact on Estates: Estates with significant assets (e.g., a large farm or a successful trading company) will see a substantial increase in their IHT liability.
  • Planning Urgency: Business succession planning and the use of trusts must be urgently reviewed to mitigate the impact of this new cap.
  • Relevant Entities: Family businesses, sole traders, partnerships, and farming families.

2. The Capital Gains Tax (CGT) Rate Increase and Investor's Relief Reduction

Capital Gains Tax is also facing a notable hike, specifically impacting certain types of asset disposal. From 6 April 2026, the lower rate of Capital Gains Tax is set to increase from 14% to 18%. This will apply to gains that fall within the basic rate income tax band.

Furthermore, the lifetime limit for Investors' Relief, which provides a lower 10% rate on the disposal of shares in unlisted trading companies, is being drastically reduced. The limit will drop from £10 million to just £1 million for all qualifying disposals. This mirrors the cap imposed on IHT reliefs and signals a clear government policy to limit generous tax breaks for investors and entrepreneurs.

Another technical but crucial change affects incorporation relief. From April 2026, this relief—which previously allowed individuals to transfer assets into a company without triggering an immediate CGT charge—will no longer apply automatically and will require specific conditions to be met.

The Digital Revolution: Making Tax Digital for Income Tax Self Assessment (MTD ITSA)

Perhaps the most widespread and practical change affecting millions of self-employed individuals and landlords is the phased introduction of Making Tax Digital for Income Tax Self Assessment (MTD ITSA). This is a fundamental overhaul of the UK's tax reporting system, replacing the annual Self Assessment tax return with mandatory digital record-keeping and quarterly updates.

3. MTD ITSA Rollout: Who Must Comply from April 2026?

The phased rollout of MTD ITSA is confirmed to begin in April 2026, but it will not affect everyone at once. The initial requirement applies to:

  • Sole Traders and Landlords with gross qualifying income from self-employment and/or rental properties of £50,000 or more annually.

Those with income between £30,000 and £50,000 are scheduled to join the scheme from April 2027, with the lowest income bracket to follow.

The new system requires taxpayers to use HMRC-compatible software to submit quarterly summaries of their income and expenses to HMRC, followed by a final declaration at the end of the tax year. This means the concept of a single annual tax return will be obsolete for those in the MTD ITSA regime, demanding a shift to real-time digital accounting. This move is designed to reduce errors and improve compliance, but it represents a significant administrative burden for small businesses and landlords who are not yet digitally proficient.

Income and Business: The Dividend Tax and WDA Squeeze

Beyond the major wealth and compliance reforms, the government has also confirmed changes that will directly impact the take-home income of investors and the investment decisions of businesses.

4. The Dividend Tax Hike: Increased Tax on Investment Income

From 6 April 2026, the rates of tax on dividend income are set to increase. This affects anyone who receives dividends from shares or their own limited company (a common structure for small business owners).

  • Basic Rate: Increases to 10.75% (up from the previous rate).
  • Higher Rate: Increases to 35.75% (up from the previous rate).

The additional rate of dividend tax remains unchanged. This change, combined with the freezing of the Income Tax Personal Allowance and thresholds (see below), means that the effective tax burden on individuals drawing income through dividends will be notably higher in the 2026/2027 tax year.

5. Reduced Writing-Down Allowances (WDA): Higher Costs for Business Investment

For businesses and the self-employed, the tax relief available for capital expenditure is being curtailed. From 1 April 2026 (for Corporation Tax) and 6 April 2026 (for Income Tax), the main rate of Writing-Down Allowance (WDA) will be reduced from 18% to 14%.

WDA is the mechanism by which businesses claim tax relief on the depreciation of assets like plant and machinery. This reduction means that the tax relief will be spread over a longer period, increasing the effective cost of investment and potentially discouraging capital expenditure in the coming years. While the Corporation Tax main rate remains at 25% for the 2026 financial year, this WDA change is a subtle but potent way of raising business tax revenue.

The Silent Tax Rise: Fiscal Drag and Frozen Thresholds

While not a "change" in the traditional sense, the continuation of the freeze on Income Tax thresholds is perhaps the most significant tax event of 2026 for the average worker. The Personal Allowance and the higher-rate tax threshold are confirmed to remain static until at least April 2028, and possibly April 2031, depending on subsequent Budgets.

This policy, known as fiscal drag, means that as wages increase due to inflation or pay rises, more people are pushed into the higher tax bands, and more of their income becomes subject to tax. For the 2026/2027 tax year, this silent tax rise will continue to erode the real value of take-home pay for millions of UK taxpayers. The lack of indexation means that the tax burden is automatically increased without the need for a formal rate hike.

Actionable Steps for Taxpayers Before April 2026

The confirmed tax changes for 2026 are complex and far-reaching. Proactive planning is now essential to navigate this new financial landscape. Taxpayers should focus on the following key areas:

  • IHT Planning: Review wills, trust arrangements, and the structure of business and agricultural assets to understand the new £1 million cap on BPR and APR. Consider lifetime gifting or restructuring assets well ahead of the April 2026 deadline.
  • MTD ITSA Preparation: Landlords and sole traders with income over £50,000 must choose and implement HMRC-compatible accounting software and begin preparing for quarterly digital reporting.
  • CGT Strategies: Review portfolios for potential disposals before the CGT rate increase to 18% takes effect. Business owners should assess the impact of the Investors' Relief reduction on any planned exit or sale.
  • Dividend Review: Company directors should review their remuneration strategy, including the balance between salary and dividends, in light of the confirmed dividend tax rate increases.

Consulting with a qualified tax adviser is highly recommended to ensure compliance with the new MTD ITSA rules and to implement effective strategies to manage the significant changes to Inheritance Tax and Capital Gains Tax reliefs.

The 5 Biggest UK Tax Changes Coming in 2026: A Full Guide to IHT, MTD ITSA, and CGT Shocks
uk tax changes 2026
uk tax changes 2026

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