This guide is designed as a practical, save-and-bookmark reference to the UK tax rates and allowances for the 2026/27 tax year. It brings together the key figures business owners need in one place, without the jargon.
Understanding these rates early makes a real difference. They affect cash flow, pricing decisions, dividend planning, and how much to set aside for tax across the year. This is especially important for limited company directors, sole traders, and growing businesses working with an accountant to stay compliant and avoid surprises.
All figures are based on HMRC thresholds and current legislation available at the time of writing. While this guide offers a reliable reference, how the rules apply will always depend on your personal and business circumstances, which is why tailored advice from experienced accountants remains essential.
Key dates for the 2026/27 tax year
Understanding which dates apply to you is essential, as UK tax rules are split between the personal tax year and business accounting periods. The table below highlights the key dates that matter most for business owners.
| Item | Date or period | Why it matters |
| 2026/27 tax year starts | 6 April 2026 | Income Tax, National Insurance, and dividend tax reset from this date |
| 2026/27 tax year ends | 5 April 2027 | Income and dividends received after this date fall into the next tax year |
| Self Assessment covers | Income earned within the tax year | Applies to sole traders and directors with personal income |
| Limited company accounting period | Based on company year-end | Corporation Tax is calculated separately from the personal tax year |
| Dividend declaration date | Date dividend is declared | Determines which tax year the dividend is taxed in |
| Bonus payment date | Date paid, not approved | Controls which tax year the bonus falls into |
| Business expenses | Date incurred | Affects which year relief is claimed |
These rules are set by HM Revenue & Customs and apply consistently across the UK, though how they affect you depends on your business structure.
For limited company directors, this split between personal tax years and company accounting periods is especially important. Salary, dividends, and expenses may all be taxed in different years depending on timing. For sole traders, profits are tied directly to the tax year, making cut-off dates just as critical.
With the key dates clear, the next step is understanding how personal allowances and Income Tax rates apply within the 2026/27 tax year.
Personal allowance and Income Tax rates 2026/27
Understanding how personal tax works is essential whether you’re a sole trader or a limited company director. Income Tax is often where planning mistakes show up first, especially when salary, drawings, or dividends are not aligned with the rules.
Personal allowance
For the 2026/27 tax year, the personal allowance remains £12,570, based on current legislation confirmed by HM Revenue & Customs.
This allowance is reduced once total income exceeds £100,000. For every £2 earned over this threshold, £1 of the personal allowance is lost. By the time income reaches £125,140, the allowance is fully removed.
For limited company directors, this has a direct impact on salary planning. Many directors choose a salary close to the personal allowance to minimise Income Tax while still maintaining National Insurance credit. Going even slightly over without planning can push part of that income into taxable territory.
Income Tax bands and rates
For England, Wales, and Northern Ireland, Income Tax bands for 2026/27 are expected to remain as follows:
| Band | Taxable income | Rate |
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Scotland operates a separate Income Tax system with different bands and rates. Scottish taxpayers should always refer to Scottish-specific thresholds when planning income, as assumptions based on UK-wide figures can lead to underpayments.
Practical insight for business owners
Limited company accountants often structure director salaries carefully to make full use of the personal allowance without triggering unnecessary Income Tax or National Insurance. This usually forms part of a wider strategy alongside dividends and pension contributions.
Sole traders commonly underestimate how quickly profits move into higher tax bands, especially once National Insurance is added. Relying on turnover rather than taxable profit, or failing to set aside funds as income grows, is one of the most common causes of cash flow stress at tax time.
Before setting your salary, drawings, or profit targets for the year, a quick review can make a meaningful difference. If you want tailored advice based on your structure and income level, it’s worth speaking with an accountant early rather than correcting issues later.
National Insurance contributions for 2026/27
National Insurance (NI) is one of the most overlooked parts of tax planning, yet it has a direct impact on take-home pay, payroll costs, and overall cash flow. How it applies depends heavily on whether you’re running a limited company or trading as a sole trader.
Class 1 National Insurance (employees and directors)
Class 1 NI applies to salaries paid through payroll, including director salaries. For limited companies, it affects both the individual and the business.
| Type | Threshold | Rate |
| Employee NI (primary) | £12,570 to £50,270 | 6% |
| Employee NI (upper rate) | Over £50,270 | 2% |
| Employer NI (secondary) | Over £9,100 | 13.8% |
These thresholds and rates follow current rules set by HM Revenue & Customs and are expected to remain in place for 2026/27 unless changed by legislation.
For limited companies, employer NI is a real cost to the business. Even when a director pays little or no employee NI, employer NI may still apply depending on salary level. This is why director salary planning is rarely done in isolation and is usually balanced alongside dividends and other allowances.
Class 2 and Class 4 National Insurance (sole traders)
For sole traders, NI is calculated through Self Assessment rather than payroll.
Class 2 National Insurance is no longer payable as a separate charge. However, if your profits exceed the lower threshold (currently aligned with the personal allowance), you still receive National Insurance credits automatically. These credits count towards the State Pension and certain benefits.
Class 4 National Insurance is charged on profits and remains payable:
| Profit level | Rate |
| £12,570 to £50,270 | 6% |
| Over £50,270 | 2% |
Many first-time sole traders are caught out because Class 4 NI is calculated on top of Income Tax, not instead of it. As profits grow, the combined effect can push the total tax and NI bill higher than expected, especially if money hasn’t been set aside during the year.
With National Insurance covered, the next step is understanding how business profits themselves are taxed, starting with Corporation Tax for limited companies.
Corporation Tax rates for limited companies
Corporation Tax applies to limited company profits and is calculated separately from personal tax. For directors, understanding how the bands work is essential because Corporation Tax directly affects how much profit is available for dividends, reinvestment, or long-term planning.
Corporation Tax bands
For the 2026/27 tax year, Corporation Tax continues to operate on a tiered system set by HM Revenue & Customs.
| Profit level | Corporation Tax rate |
| Up to £50,000 | 19% (small profits rate) |
| £50,001 to £250,000 | Marginal relief applies |
| Over £250,000 | 25% (main rate) |
Companies with profits of £50,000 or less pay Corporation Tax at the small profits rate. Once profits exceed this level, marginal relief gradually increases the effective tax rate until the full main rate applies at £250,000.
Marginal relief often causes confusion. In simple terms, it prevents companies from jumping straight from 19% to 25% Corporation Tax all at once. Instead, the rate increases gradually as profits rise, smoothing the transition between the two bands.
How profit levels affect Corporation Tax planning
Corporation Tax planning is not just about the headline rate. The level of profit reported in a given accounting period can significantly change the tax outcome.
The timing of income and expenses matters. Bringing income forward or delaying certain costs can push profits into a higher band, while well-timed investments, allowable expenses, or pension contributions may reduce taxable profits for that period.
Corporation Tax also interacts closely with dividends and retained profits. Paying higher dividends reduces retained profit but does not reduce the Corporation Tax bill itself, as dividends are paid from post-tax profits. This makes it important to balance how much profit stays in the company versus how much is extracted personally.
Practical insight for directors
Limited Company Accountants help directors avoid unexpected Corporation Tax bills by forecasting profits before the year-end, not after it. This allows time to adjust salary, dividends, expenses, or investment decisions while options are still available.
Without forward planning, many directors only discover their true tax position once the accounts are finalised, when it is often too late to change the outcome. Knowing where your profits sit well before the year-end is one of the simplest ways to stay in control.
Dividend tax rates and allowances 2026/27
Dividends remain a common way for limited company directors to take income, but the rules have tightened significantly in recent years. Understanding how dividend tax works in 2026/27 is key to avoiding unexpected personal tax bills.
Dividend allowance
For the 2026/27 tax year, the dividend allowance remains £500, based on current thresholds published by HM Revenue & Customs.
This allowance means the first £500 of dividend income is taxed at 0%, not that it is ignored. Dividends above this amount are fully taxable, and they still count towards your overall income when determining tax bands. This is why dividends are no longer considered “tax-free income” in any meaningful sense, especially for directors with higher earnings.
Dividend tax rates
Dividend tax rates depend on your total taxable income after allowances.
| Income band | Dividend tax rate |
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
These rates apply across England, Wales, and Northern Ireland. While Scotland has separate Income Tax bands, dividend tax rates remain UK-wide.
Dividend planning for directors
Dividends are usually taken alongside a salary, and the balance between the two matters. Salary is subject to Income Tax and National Insurance, while dividends are not subject to NI but are taxed at the rates above. The most efficient mix depends on profit levels, other income, and long-term plans.
One of the biggest risks directors face is over-extracting profits. Dividends can only be paid from available post-tax profits. Taking too much too early can create cash flow pressure or lead to unlawful dividends, which often surface during HMRC reviews or when accounts are prepared.
Before declaring dividends, it’s worth speaking with an accountant who can confirm profit availability and help plan withdrawals tax-efficiently. A short review at the right time can prevent issues that are far harder to fix later.
VAT thresholds and rates
VAT is one of the most closely monitored areas of UK tax, and mistakes tend to surface quickly. Whether VAT applies to your business depends on turnover, sector, and how you trade, but understanding the core thresholds and rates is essential.
VAT registration threshold
For the 2026/27 tax year, the VAT registration threshold remains £90,000 of taxable turnover in a rolling 12-month period, as set by HM Revenue & Customs.
Once your turnover exceeds this threshold, VAT registration becomes mandatory. Businesses approaching the limit should monitor turnover carefully, as late registration can result in backdated VAT liabilities and penalties.
Voluntary registration is also an option for businesses below the threshold. This can make sense if you have significant VAT-reclaimable expenses, sell mainly to VAT-registered customers, or want to present a more established business image. However, voluntary registration also brings ongoing reporting and compliance obligations, so it should be assessed carefully.
| VAT rate | Percentage | Typical use |
| Standard rate | 20% | Most goods and services |
| Reduced rate | 5% | Certain energy supplies and specific services |
| Zero-rated | 0% | Some food, children’s clothing, books, and exports |
Applying the wrong rate is a common source of VAT errors, particularly for businesses selling mixed supplies or operating online across different product categories.
VAT and cash flow
VAT errors are considered high risk by HMRC because VAT is collected on the government’s behalf. Undercharging, late registration, or incorrect reclaiming of input VAT often leads to enquiries, assessments, and penalties.
Growing businesses and eCommerce sellers are especially vulnerable. Common traps include forgetting to account for VAT on delivery charges, misunderstanding marketplace VAT responsibilities, reclaiming VAT on ineligible expenses, or failing to adjust pricing once VAT registration kicks in. Any of these can quickly turn into a cash flow problem if VAT hasn’t been set aside.
With VAT covered, the next step is understanding the allowances and reliefs that can reduce taxable income and improve overall tax efficiency.
Other key allowances and reliefs to know
Beyond headline tax rates, allowances and reliefs play a major role in reducing how much tax you actually pay. Used correctly, they can improve cash flow and long-term efficiency. Used incorrectly, they can be missed entirely.
Trading allowance
The trading allowance provides up to £1,000 of tax-free income for individuals with small amounts of trading or miscellaneous income, under rules set by HM Revenue & Customs.
This allowance can apply to very small-scale activity, such as casual self-employment or side income, where expenses are minimal. In these cases, it can remove the need to deduct actual costs.
However, it rarely benefits established business owners. Sole traders with regular expenses are usually better off claiming allowable costs instead of the flat allowance. Limited company directors cannot use the trading allowance against company income at all, which is a common misunderstanding.
Capital allowances
Capital allowances provide tax relief when your business buys qualifying assets, such as equipment, machinery, or certain vehicles.
The Annual Investment Allowance (AIA) allows businesses to deduct the full cost of qualifying assets up to the annual limit in the year of purchase. This can significantly reduce taxable profits for that period, whether you are a sole trader or operating through a limited company.
Timing matters. Buying assets just before a year-end can bring tax relief forward, while poorly timed purchases may reduce the immediate benefit. Not all assets qualify in the same way, and some items attract different relief rules, so assumptions can be costly.
Pension contributions
Pension contributions are one of the most tax-efficient tools available to UK business owners.
For limited company directors, employer pension contributions are usually treated as a business expense. This means they can reduce Corporation Tax while also building personal retirement savings, without triggering Income Tax or National Insurance.
Sole traders can also benefit through personal pension contributions, which typically attract Income Tax relief. The value depends on profit levels and tax bands, but when structured properly, pensions can outperform many other forms of tax planning.
Because pension rules interact with both Corporation Tax and Income Tax limits, they work best when planned in advance rather than added as an afterthought.
Next, we’ll look at how all these rates and allowances come together depending on your business structure and why the same income can be taxed very differently for sole traders and limited companies.
Preparing for MTD changes? This MTD for Income Tax 2026 guide explains what’s changing and how to stay compliant before the new rules apply.
How tax rates affect different business structures
The same level of income can produce very different tax outcomes depending on how your business is structured. Understanding these differences is essential for planning, not just compliance.
Sole traders
Sole traders pay tax directly on business profits through Self Assessment. Profits are subject to Income Tax and Class 4 National Insurance, with Class 2 credits applied where thresholds are met.
Because tax and NI are calculated together, total liabilities can rise quickly as profits increase. This often catches sole traders off guard, especially in the first few years of trading. Cash flow planning becomes critical, as tax is usually paid well after the income is earned, but in large lump sums.
Setting aside funds regularly and forecasting tax liabilities throughout the year helps avoid the shock of an unexpected bill.
Limited companies
Limited companies are taxed in layers. The company pays Corporation Tax on its profits, and directors then pay personal tax on money extracted through salary and dividends.
This structure allows more flexibility but also requires coordination. Salary affects National Insurance and personal allowances, dividends are taxed separately, and retained profits remain within the company after Corporation Tax. Without a joined-up approach, it’s easy to pay more tax than necessary or create cash flow strain.
When it may be time to change structure
For many businesses, there comes a point where operating as a limited company becomes more tax-efficient than remaining a sole trader. This often happens once profits rise above a certain level, although there is no single threshold that applies to everyone.
Incorporation can reduce overall tax exposure, but it also introduces additional responsibilities, including statutory accounts, Corporation Tax returns, and ongoing compliance. The decision should be based on projected profits, income needs, and long-term plans, not just headline tax savings.
Tailored advice is essential here. A structure that works well for one business may be unsuitable for another, even at the same profit level.
Next, we’ll look at why working with an accountant matters more than ever as tax rules tighten and reporting requirements increase.
Running a limited company into year end? This 2026 limited company year-end accounting checklist outlines what to review before accounts are finalised.
Why working with an accountant matters more in 2026/27
HMRC is relying more heavily on data-matching, real-time information, and automated compliance checks, making tax errors easier to detect and harder to fix later. Alongside this, the expansion of Making Tax Digital means more frequent reporting and less margin for inaccuracy across Income Tax, VAT, and business records.
Experienced sole trader accountants and limited company accountants help reduce this risk by keeping reporting accurate, applying allowances correctly, and supporting better decisions around salary, dividends, and cash flow throughout the year.
If you want tailored tax planning rather than reactive compliance, speak with eAccounts UK about support built around your business.
Wrapping up
Tax rates and allowances do more than determine how much you pay at year end. They shape everyday business decisions, from pricing and cash flow to how and when income is taken. Understanding the rules for the 2026/27 tax year puts you in a stronger position to plan with intention rather than react under pressure.
Early planning makes a clear difference. Reviewing your position before the tax year progresses allows time to adjust salary, dividends, expenses, and structure while options are still open, instead of correcting issues after deadlines pass.
With the right accountant in place, the 2026/27 tax year does not need to feel uncertain or stressful. Clear advice, accurate reporting, and forward planning help turn tax from a risk into something predictable and manageable.
FAQs
Are the 2026/27 tax rates confirmed?
Most core rates and thresholds are set in advance by HM Revenue & Customs, but how they apply will still depend on your income level, business structure, and personal circumstances.
Do limited company directors pay both Corporation Tax and Income Tax?
Yes. The company pays Corporation Tax on its profits, and directors pay personal tax on income taken as salary and dividends.
Is the VAT threshold increasing in 2026/27?
At present, the VAT registration threshold remains unchanged. Businesses close to the limit should continue to monitor turnover and HMRC announcements.
Can an accountant help reduce my tax bill legally?
Yes. A qualified accountant can apply allowances, reliefs, and planning strategies within HMRC rules to improve tax efficiency.
When should I review my tax position for 2026/27?
Ideally before the tax year starts, especially if you expect changes to income, dividends, or your business structure.
