With the new tax year fast approaching, it is important to be aware of tax changes for small business owners from April 2026. Two significant tax changes will impact directors of limited companies, self-employed individuals (sole traders) and landlords. The tax rate on dividend income is increasing by 2%, which impacts company directors. Making Tax Digital (MTD) comes into effect for self-employed individuals and landlords with income above £50,000.
Increase in dividend tax from April 2026
From April 2026, limited company directors who pay themselves with a mix of a salary and dividends will pay more tax. Dividend tax is increasing by 2% on dividends falling within the basic and higher rate tax bands. The basic rate dividend tax rate is increasing to 10.75%, up from 8.75%, while the higher rate is increasing to 35.75%, up from 33.75%. The additional dividend tax band rate remains at 39.35%.
A director paying themselves £50,270 from their limited company, splitting this between a salary of £12,570 and dividends of £37,700, pays an extra £744 a year in dividend tax from April 2026. The first £500 of dividends is covered by the annual £500 dividend allowance and is tax-free. The remaining £37,200 of dividends are taxed at 10.75%, equating to tax of £3,999 (compared with £3,255 in 2025/26).
MTD – making tax digital for the self-employed and landlords
Self-employed individuals and landlords with annual income over £50,000 must register with HMRC for MTD. From April 2026 they will need to submit quarterly income and expense summaries to HMRC. If you are self-employed with turnover over £50,000, or a landlord with property income over £50,000, you will need to keep electronic records of your income and expenses. You can find details of MTD compliant accounting software HMRC’s website. MTD compliant software will allow you to track your income and expenses. Each quarter, you will submit a summary of your income and expenses to HMRC.
MTD is being rolled out over three years, applying to self-employed individuals and landlords as follows:
6 April 2026 – if your turnover or property income is over £50,000
6 April 2027 – if your turnover or property income is over £30,000
6 April 2028 – if your turnover or property income is over £20,000
Benefits of MTD submissions
Quarterly submissions may improve your business administration, helping you track your tax liability and improve your cash flow management. While there may be additional costs, many small business owners may find the administrative benefits outweigh them.
Missing submission deadlines
If you fall under MTD, it’s important to register and submit your business information by the quarterly deadlines. HMRC will issue you with penalty points for each late submission, and a fine once you reach a certain number of points.
OtherMTD resources
HMRC have put together a comprehensive resource about MTD on their website, which includes details of MTD compliant software:
There are numerous allowable and disallowable business expenses in the UK that business owners need to be familiar with. HMRC has clear rules about business expenses, and it is vital to have a clear understanding of these rules to minimise your tax liability and ensure your tax calculations are compliant.
What are allowable business expenses?
HMRC states that allowable business expenses must be ‘wholly and exclusively’ for business purposes. Allowable business expenses can be deducted from your profit, reducing your taxable profit and tax liability. Common allowable business expenses are:
Cost of goods purchased for resale or raw materials used in production
Marketing and advertising expenses.
Professional fees for accountants, lawyers and consultants.
Staff costs, including salaries, national insurance, pensions and training.
Office costs, such as stationery, phone bills and computer consumables.
Business premise costs, such as rent, rates, utilities and insurance.
Travel expenses for business purposes, like fuel, train fares, and hotel accommodation.
Financial costs, such as bank charges and interest on loans.
What are disallowable expenses?
Disallowable expenses are costs that have an element of personal use or are specifically disallowed by HMRC. These cannot be deducted from your profits. Some of the more common disallowable expenses are:
Entertainment costs for clients or suppliers.
Charitable giving – only donations to HMRC-approved charities are allowable.
Personal expenditure, such as your own clothing (unless it’s a business uniform or protective gear) and non-business travel.
Fines and penalties, such as parking fines and HMRC fines.
Capital expenditure and asset depreciation – capital tax allowances are available, which replace depreciation for tax purposes.
Personal use of mixed-use expenses.
The above highlights the most common business expenses but is not a comprehensive list of all deductions. For more information about business expenses, use the HMRC links below:
Capital expenditure is money spent on acquiring tangible assets or used to improve assets, such as equipment, vehicles and computers used in the business. Unlike day-to-day operating expenses, the cost of acquiring fixed assets is spread over the expected useful life of the asset. This is done by expensing the expected annual costs as depreciation in the profit and loss statement.
Instead of using depreciation, HMRC provides capital allowances, which serve a similar function but have specific tax rules. Of the allowances, the Annual Investment Allowance (AIA) allows businesses to claim 100% tax relief on qualifying assets up to a certain threshold in the first year of purchase. You can find out more about the other available tax allowances using the HMRC link below:
Annual staff parties up to a combined total of £150 (incl. VAT) per head are tax-deductible if they meet specific requirements, such as being open to all employees. If the total annual amount exceeds £150 per head, the full amount becomes taxable as a benefit in kind to employees.
The cost remains fully deductible for the business for corporation tax, regardless of whether the £150 per head threshold is exceeded. The business will, however, be liable for the employer’s national insurance on the full amount (currently 15%) if the £150 limit is exceeded. The staff benefit in kind will need to be declared on P11Ds, and employees will be taxed on the amount of the benefit.
Trivial benefits
Trivial benefits are small, non-cash gifts or perks worth £50 or less that can be given to employees tax-free, provided they aren’t cash or cash vouchers. Directors of closed limited companies are limited to £300 (6 x £50) worth of trivial benefits annually.
When individual trivial benefits exceed the £50 limit, the full amount becomes taxable as a benefit in kind to the employee. The business will be required to pay the employer’s national insurance on the benefit, but can claim the trivial benefit amount as an allowable deduction for business tax.
For more information about the staff benefits, use the HMRC links below:
Understanding your business expenses is essential for accurate tax reporting and maximising tax efficiency. While this guide covers the most common allowable and disallowable expenses, tax rules can be complex and subject to change. If you’re unsure about whether a particular expense qualifies or how to handle mixed-use costs, it’s always advisable to consult with a qualified accountant or tax advisor.
Proper record-keeping with receipts and invoices is crucial – not only does it make claiming expenses easier, but it also provides the evidence HMRC may request during an enquiry. By staying informed and maintaining accurate records, you can ensure your business remains compliant while taking advantage of all legitimate tax deductions available to you.
UK side hustles have become increasingly popular among individuals looking to supplement their income. Whether you’re selling handmade crafts on Etsy, offering freelance services, or running a small online business, understanding your tax obligations is crucial, especially once your sales exceed the £1,000 trading allowance threshold. This article covers side hustles, the trading allowance and tax returns, detailing when you need to submit a self assessment tax return.
How does the UK trading allowance work?
UK individuals have a £1,000 tax-free trading allowance, which allows them to earn up to £1,000 tax-free running a small side business. This means if your annual sales turnover (not profit) is £1,000 or less, you don’t need to report it to HMRC or pay tax on this income.
However, once your sales exceed £1,000 for the financial tax year (April 6th to 5th of April of the subsequent year), you may have to pay tax. You will also be required to register as self-employed with HMRC and submit an annual self assessment tax return.
Your tax obligations once your sales exceed the £1,000 threshold
When your side hustle turnover or sales exceed the trading allowance, you’re legally required to:
Register as self-employed with HMRC
Complete a self assessment tax return annually
Pay income tax on your profits (sales minus expenses)
Pay national insurance contributions if your profits exceed the national insurance threshold
Failing to declare this income can result in penalties and interest charges, so it’s important to make sure you are compliant from the start. You can check if you need to register for self assessment using the link below:
Basic rate taxpayers pay 20% tax on side hustle profits that exceed the trading allowance and the personal allowance. You will pay national insurance of 6% on taxable profits between £12,570 and £50,270. Taxable profits over £50,270 incur national insurance of 2%. Higher-rate taxpayers pay 40% tax, while additional-rate taxpayers pay 45% tax on profits that fall within the higher and additional-rate tax bands.
Deducting the trading allowance or business expenses?
You can choose between deducting the trading allowance of £1,000 from your sales or deducting allowable business expenses, but not both. The balance remaining is your taxable profit, and it’s important to understand how these calculations are made to determine which option is the most tax-efficient.
Examples of the trading allowance
The examples below illustrate the different tax outcomes between deducting the trading allowance and deducting allowable business expenses.
Aidan has a side business walking dogs during his lunch hour. He’s earned £1,200 (sales) this year and his only business expense is £20 on poo bags. The table below shows the tax liability if Aidan deducts the trading allowance compared with deducting the business expenses of £20.
Trading allowance (TA)
Business expenses
Sales of £1,200
1,200
1,200
TA/business expenses
1,000
20
Taxable income
200
1,180
Tax due at 20%
40
236
In this example, it is far more tax-efficient for Aidan to deduct the trading allowance, resulting in a tax liability of £20 as opposed to £236 if he deducts his business expenses.
Laura makes earrings and sells them on Etsy. She made sales of £3,000 in the current tax year, and her business expenses are £1,250.
Trading allowance (TA)
Business expenses
Sales of £3,000
3,000
3,000
TA/business expenses
1,000
1,250
Taxable income
2000
1,750
Tax due at 20%
400
350
In this example, it is more tax-efficient for Laura to deduct her allowable business expenses rather than the trading allowance, as this saves her £50 in tax.
Track your side hustle finances
It’s vital to track your side hustle finances so you can accurately estimate any tax and national insurance obligations. Maintaining records of your sales and business expenses is a legal requirement of being self-employed. Keeping accurate records of the following information will help you analyse your business performance and keep track of your tax liability:
Income from all sales platforms
Allowable business expenses
Payment methods used
Product or service performance
Calculating your sales figures
You need to ensure you are calculating your sales figures correctly for tax records. If you are selling goods online, the amount you receive on individual sales may have online platform and bank fees deducted.
For tax purposes, your sales figure is the selling price, not the amount you receive after platform and bank fee deductions. These fees are business expenses. You must add back any deducted fees to the amount you’ve physically received when calculating your sales figures for tax.
Side hustle sales figure example
For example, Lucy sold ten paintings, each with a sales price of £105. After online platform fees, she received £95 per painting. Lucy’s side hustle net income for the year is £950, and she assumes she does not need to complete a tax return as her income is below the trading allowance of £1,000. This is incorrect, as Lucy’s gross sales are £1,050, meaning she must submit a self assessment tax return.
Lucy should deduct the trading allowance from her sales, as this delivers a lower taxable income of £50 and a tax liability of £10 (assuming Lucy is a basic rate taxpayer). Deducting the business expenses (fees) of £100 results in a much higher taxable income of £950 and tax of £190.
How we can help with your side hustle
In our shop, we have a Side Hustle Tax Calculator spreadsheet that helps you estimate your tax and national insurance liability, whilst tracking your sales and business expenses.
The Excel spreadsheet helps you:
Estimate your tax liability based on current UK tax rates
Track all income sources across different sales platforms (Etsy, eBay, Amazon, etc.)
Record business expenses
Analyse sales performance by product category
Monitor payment methods (PayPal, Stripe, bank transfers)
Prepare for self assessment with organised financial figures
During their term or by the end of 2029, the current parliament aims to increase the threshold for submitting self assessment returns on trading income to £3,000. Tax will still be due on income over the £1,000 trading allowance threshold and will be declared to HMRC using a simplified online platform, in place of a full tax return.
This article provides general information only and should not be considered professional tax advice. Tax regulations are subject to change, and individual circumstances vary. Please consult with a qualified tax professional for advice specific to your situation.
The UK has a marginal tax system and numerous tax allowances that allow individuals to earn certain types of income tax-free. In this article, we cover some of the main tax allowances available to UK individuals, together with details of the three income tax bands and rates. Below are some of the UK personal tax-free allowances that let you make money tax-free.
Allowance
Tax-free amount
Personal allowance
£12,570
Dividend allowance
£500
Capital gains allowance
£3,000
Personal savings allowance – basic rate taxpayers
£1,000
Personal savings allowance – higher rate taxpayers
£500
Trading allowance
£1,000
Personal allowance
The main tax-free allowance individuals in the UK benefit from is the annual personal allowance of £12,570, which lets individuals earn income up to this amount before paying any tax or PAYE.
Reducing personal allowance
The personal allowance reduces once taxable income exceeds £100,000. The allowance is reduced by £1 for every £2 earned over £100,000. You lose the personal allowance once your annual income exceeds £125,140.
Tax bands and rates
England, Wales, and Northern Ireland have three tax band thresholds and income tax rates. The first £12,570 of income is tax-free. Income between £12,570 and £50,270, or the next £37,700, falls in the basic rate tax band and is taxed at 20%. The higher rate tax band of 40% tax, applies to income over £50,270 and up to £125,140. And finally, the additional rate tax band of 45% applies to income over £125,140. Note that Scotland has different tax bands and rates than the rest of the UK.
Tax band
Taxable income
Tax 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%
Reduced or enhanced personal allowance
If you have underpaid or overpaid tax during a tax year, HMRC may amend your tax code. This means you will have a different personal tax-free allowance to the standard £12,570 and different tax band thresholds. If you have underpaid tax you will have a reduced personal allowance. For example, if you have a tax code of 950L, you have a reduced tax-free allowance of £9,500 which means:
The first £9,500 of income is tax-free
You pay tax of 20% on the next £37,700 of income.
You pay 40% tax on income above £47,200 (£9,500 + £37,700) and up to £125,140.
If you’ve overpaid tax during a previous tax year, HMRC may reimburse this by increasing the amount of your personal allowance or tax code. For example, if your tax code is 1300L, you will have an enhanced personal allowance of £13,000 and your tax band thresholds will be:
The first £13,000 of income is tax-free.
You pay tax of 20% on the next £37,700 of income.
You pay tax of 40% on income above £50,700 (13,000 + 37,700) and up to £125,140.
Marginal tax
In a marginal tax system, higher tax rates only apply to that portion of income falling within the next tax band. For example, someone making £53,000 a year pays 20% tax on their earnings between £12,570 and £50,270. They pay 40% tax on their remaining pay of £2,730 (£53,000 less £50,270) which falls in the higher rate band.
Personal savings allowance
Basic rate taxpayers benefit from the full £1,000 annual personal savings allowance, letting them earn up to £1,000 of interest from savings tax-free. Higher-rate taxpayers have a reduced allowance of £500, while additional-rate taxpayers have a nil allowance.
Capital gains allowance
The current UK annual capital gains allowance is £3,000.
When you sell certain assets, profits up to £3,000 per annum are tax-free. Basic rate taxpayers pay 18% tax on any profits from the sale of assets over £3,000, while higher and additional rate taxpayers pay 24%.
Dividend allowance
The current dividend allowance is £500 per year, meaning you can earn up to £500 of dividend income tax-free annually from shareholdings.
Dividends falling within the basic tax rate band are taxed at 8.75%, whilst those falling within the higher rate band are taxed at 33.75%. Dividends falling in the additional tax rate band are taxed at 39.35%.
You can avoid dividend and capital gains tax on share income and disposals by investing in the stock market using tax-free stocks and shares ISAs.
Trading allowance
Individuals in the UK receive an annual tax-free trading allowance of £1,000. The allowance lets you earn up to £1,000 in trading income each tax year without having to report the income to HMRC or pay tax on the earnings. If your gross trading income exceeds £1,000, you must register for self assessment and submit an annual tax return. You can either deduct the £1,000 allowance from your income or deduct the allowable business expenses, whichever is more tax efficient, but you cannot deduct both.
Structure your income and allowances
Having an understanding of personal tax-free allowances can help you structure your income and allowances in a more tax-efficient way, potentially reducing your tax. Below are some examples of how tax strategies can save you money:
Only withdraw capital gains from stocks and shares investments up to the annual capital gains allowance of £3,000 spreading withdrawals over several years.
Invest in the stock market using a tax-free ISA.
If you save money in a regular savings account make sure the savings allowance covers the annual interest and save any extra money in a tax-free ISA savings account.
HMRC’s website provides information about other allowances, such as the property allowance and marriage allowance:
How does marginal corporation tax for business work?
Limited companies in the UK pay corporation tax on their net profits. UK marginal corporation tax consists of three different tax bands and rates. The tax rate is determined by the amount of a business’s net taxable profit. Companies with net profits of £50,000 and below pay 19% corporation tax. Those with net profits between £50,000 and £250,000 pay a corporation tax rate between 19% and 25% and companies with profits above £250,000 pay 25% tax. The marginal rate of tax is 26.5% and is paid on net profits between £50,000 and £250,000.
How does marginal rate relief work?
Marginal rate relief applies to profits between £50,000 and £250,000 and is calculated using a formula provided by HMRC. The formula is:
Standard fraction x (Upper limit – augmented profits) x amount of taxable profits ÷ augmented profits
As an illustration, assume a net profit of £60,000. The standard fraction is 3 ÷ 200. Applying this to the formula gives:
3 ÷ 200 x (250,000 – 60,000) x (60,000 ÷ 60,000) = £2,850 marginal relief
There are two options for calculating the corporation tax. You can multiply the net profit of £60,000 by 25%, which equals £15,000. Then deduct the marginal relief of £2,850, resulting in a tax liability of £12,150, or an effective tax rate of 20.25%.
Alternatively, you multiply £50,000 of the profit by 19%, which is £9,500. Multiplying the remaining profit of £10,000 by the marginal tax rate of 26.5%, results in marginal relief of £2,650. Adding both amounts gives a total tax of £12,150.
An easier way to calculate corporation tax is by using HMRC’s calculator which is available using the link below:
£18,750 – £2,625 = £16,125 effective tax rate of 21.5%
Profits of £100,000
£50,000 x 19% = £9,500
£50,000 x 26.5% = £13,250
Total tax of £22,750
OR
£100,000 x 25% = £25,000
less marginal relief of:
3 ÷ 200 x (£250,000 – £100,000) = £2,250
£25,000 – £2,250 = £22,750 effective tax rate of 22.75%
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