Get ready for the new tax year

The end of the tax year is always busy, but this one matters more than most.

As the 2025/26 tax year closes on 5 April 2026, a wave of new rules and rate changes is lining up for 2026/27 that will affect your small businesses in London.

1. Why 2026/27 is a turning point for your business

From 6 April 2026, three big shifts land at roughly the same time:

• Making Tax Digital (MTD) for Income Tax becomes mandatory for the first wave of sole traders and landlords.

• Dividend tax rates go up by two percentage points for basic and higher-rate taxpayers, which hits many owner-managed companies who pay themselves via dividends.

• Capital allowances change, with a new 40% first-year allowance and a lower 14% writing-down allowance for main pool plant and machinery.

On top of that, the government is tightening the rules on late payment, including a legal cap on payment terms dropping towards 45 days and new enforcement powers for the Small Business Commissioner.

This is a shift in how you:

• Record and report your income.

• Pay yourself from your company.

• Decide when to invest in equipment.

• Manage cash flow and chase invoices.

2. Making Tax Digital (MTD) for Income Tax: what it means for you

Self-employed people and landlords are moving onto a fully digital system.

Instead of one big Self Assessment once a year, you keep digital records and send updates through software several times a year.

Who does MTD apply to from April 2026?

From 6 April 2026, you have to follow the MTD rules for income tax if:

• You're a sole trader and/or an unincorporated landlord.

• You're in Self Assessment.

• Your "qualifying income" is more than £50,000 based on the 2024/25 tax year.

Limited companies are not part of MTD for Income Tax (they're already covered by MTD for VAT and normal Corporation Tax rules).

But if you trade as a sole trader alongside your company, your sole-trader income can still bring you into scope.

What changes in practice?

If you fall into MTD for Income Tax, you need to:

• Keep digital records for each business and/or property business.

• Use HMRC-compatible software (such as cloud accounting tools).

• Send quarterly updates of income and expenses to HMRC (four times a year).

• Submit an end-of-period statement and a final declaration after the tax year ends.

There's a "softer" penalty regime in the first year, with a points-based system that only triggers financial penalties after repeated late submissions.

What to do before 5 April 2026

If you're a London sole trader or landlord, use this year-end as a checkpoint:

• Work out your qualifying income to see if the £50,000 threshold applies.

• If you're close to the line, speak to your accountant about how MTD affects you and whether MTD is likely to become mandatory from April 2026 or later.

• Choose and test software now, rather than trying to change systems in the middle of the year.

• If you think you may be digitally exempt, ask your accountant or financial adviser about exemption routes.

It's also a good moment to tidy your bookkeeping habits. Separate business bank accounts, consistent invoicing and clear records make MTD much less painful.

3. Dividend tax rise: what it means for owner-managers

Many small company directors in London pay themselves with a small salary plus dividends, because historically this has been tax-efficient.

From 6 April 2026, the numbers shift:

• The basic rate of dividend tax increases from 8.75% to 10.75%.

• The higher rate rises from 33.75% to 35.75%.

• The additional rate stays at 39.35%.

• The £500 tax-free Dividend Allowance remains in place.

How to respond

Sitting down with your accountant before the end of the tax year can help you:

• Check whether your current mix of salary and dividends still makes sense from 2026/27.

• Look at whether pension contributions, company benefits or even retaining profits in the company might be more efficient in your situation.

• Decide whether bringing forward or deferring a dividend (within the rules) could make sense this year.

The key point is not to roll your existing pay pattern into 2026/27 without checking the numbers first.

4. Capital allowances: 14% writing-down vs 40% first-year allowance

Capital allowances are the tax relief you get on assets you keep and use in your business – things like machinery, equipment, IT kit and certain fixtures.

Instead of deducting the full cost as an expense straight away (as you might with stock or rent), you claim it over time through allowances.

From 1 January 2026, a new layer has been added:

• A 40% first-year allowance (FYA) for certain main-rate plant and machinery (including some assets for leasing, and available to unincorporated businesses).

• From April 2026, the main rate writing-down allowance (WDA) drops from 18% to 14% on the remaining balance.

At the same time, the Annual Investment Allowance (AIA) – which gives 100% relief on qualifying plant and machinery up to £1 million a year – remains in place and is now effectively permanent.

What this means for small London businesses

For many small businesses, the £1 million AIA limit is more than enough to cover annual spending on equipment.

If that's you, you may still be able to claim 100% relief upfront via AIA and not worry too much about WDA vs FYA – your accountant can confirm.

Where this really starts to matter is if:

• You invest heavily in plant and machinery.

• You buy assets for leasing that other reliefs didn't fully cover before.

• Your spending goes beyond the AIA limit, so some costs inevitably end up in the main pool.

For some businesses, especially capital-intensive ones, timing your investment around 1 January and 6 April 2026 can change the speed at which you get tax relief.

It's worth modelling purchases with your accountant or financial adviser, particularly if you're planning large upgrades to premises or equipment.

5. Late payment and cash flow protections: new rules to watch

Late payment has always been a sore point for small London firms – especially if you're supplying big corporates or public bodies.

A new law is on the way that aims to shift the dial in your favour. The government's late payment reforms will:

• Introduce a legal cap on payment terms, starting at 60 days and tightening to 45 days over time.

• Require a standard 30-day invoice verification period, so customers can't use endless "queries" to delay payment.

• Give the Small Business Commissioner powers to carry out spot checks and enforce against persistent late payers, including the possibility of significant fines.

Exactly how and when each part bites depends on how the law is finalised.

But the direction of travel is clear: long, one-sided payment terms are going out of fashion – and may become unlawful in some cases.

What this means for your contracts

As the rules come in, use the year-end as a natural moment to review your:

• Customer contracts and terms – do any payment clauses exceed 60 days now, or 45 days in future? If you're the payer, you may need to update them to stay within the rules. If you're the supplier, think about whether you can renegotiate tighter terms.

• Invoicing process – the faster and more accurate your invoices, the less room there is for "admin" delays. Make sure they include purchase order numbers, agreed descriptions and clear due dates.

• Credit control – consider simple steps like polite chaser emails, statements of account and clear "stop supply" points for chronic late payers, so you're not carrying risk all the time.

The combination of stricter legal rules and a stronger enforcement body should help cash flow – but only if your own paperwork and processes are solid enough to back up a claim.

6. Action plan for the year-end: turning rules into a checklist

There's a lot happening, but you don't need to fix everything in one go. As this tax year wraps up, work through these areas in order.

Digital compliance (being ready for MTD)

Make a simple list of all your sources of income. Mark which ones are self-employment or property and total them up.

This tells you whether you're heading towards MTD for Income Tax from April 2026 or later.

If you are, choose software, try a test run and speak to your accountant about when to sign up.

Cash flow forecasting

Build a basic 12-month forecast that shows money in and out by month. Factor in:

• Higher dividend tax from April 2026, if you rely on income from dividends.

• Any planned spending on equipment, and how quickly tax relief arrives.

• Likely changes to payment terms with large customers.

A simple spreadsheet with conservative assumptions is enough to highlight pinch points.

Investment planning

If you know you need new equipment, vehicles or refurbishments, sketch out the timing:

• What absolutely has to happen in 2025/26?

• What could you delay into 2026/27 to take advantage of the new 40% first-year allowance?

• Are you making full use of the £1 million Annual Investment Allowance where appropriate?

Run two or three scenarios with your accountant to see how the tax relief falls in each year and how it affects cash.

Audit of contracts and terms

Pull out your standard terms and your biggest customer and supplier contracts. Check:

• Are your outgoing payment terms likely to breach the new caps?

• Are you tied into any very long payment terms as a supplier that you could now challenge or renegotiate?

• Do your contracts spell out what happens if invoices are late – for example, charging interest, suspending services or going down the dispute resolution route?

Tidying these up now means you're not trying to renegotiate under pressure once the new rules are live.

Personal remuneration check

Finally, if you're a director-shareholder, ask your accountant to review your salary/dividend mix specifically for 2026/27 based on the new dividend rates.

A small adjustment to how you draw money from the company can sometimes offset part of the tax rise.

Conclusion

For many London business owners, the end of this tax year is a key point into a more digital, more tightly regulated environment.

This is exactly the kind of moment to book time with your accountant or tax adviser. Bring your numbers, your contracts and your questions.

A couple of focused conversations now can reduce nasty surprises next year and give you a clear plan for 2026/27 and beyond.

Read more

• HMRC and tax obligations: the London business starter's guide

• Finding the right accountant: a guide for London SMEs

• An essential guide to cash flow management

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