Churchgates 2026 Budget Analysis

The Reeves budget of 2024 quickly became infamous for its restriction of Inheritance Tax reliefs, drawing the ire of most family business owners, particularly farmers. So much so that just two days before Christmas (2025), the Government folded and increased the relief upper limit to £2.5m.

By contrast, the 2026 Budget delivered by (this latest incarnation of) the Chancellor of the Exchequer, seems, at least on face value, more understated. Here, there is no single tentpole policy.  Instead, the Chancellor has tip-toed around the tax statute book, tweaking here, adjusting there.

The budget was accompanied by a swathe of tax documents (many of which are so verbose that they can send even the most enthusiastic accountant to sleep!) promising consultations aplenty and technical detail to follow in the future, but as we stand today, the key tax points appear to be:

1. Individuals
   • Pension Tax Allowance – intended to remove the Income Tax liability for pensioners with total income up to the value of the new State Pension from 6 April 2027 until 5 April 2030. The value of the new allowance will be calculated by applying the basic rate of Income Tax (20%) to the difference between the full new state pension and the personal allowance.  This is given as a ‘tax reducer’ rather than a supplement to the tax-free personal allowance.  For individuals with total income above the value of the full new State Pension, the reduction will be withdrawn through a taper at a rate of £1 for every £3 of income above the full new State Pension amount. This means that the reduction continues until the Pension Tax Allowance is completely withdrawn.
   • Cash ISAs – the £20,000 cash ISA subscription level will be maintained from April 2027 onwards. A swift about-face from the 2025 announcement that the levels of cash subscriptions would be limited to £12,000 for younger savers, so as to encourage more investment in capital markets via stocks & shares ISAs.
   • Income Tax increases on savings and rental income – a 2% increase across all bands (from April 2027) on top of the 2% already added in the previous budget, meaning that the basic rate of tax on this income will be 24%, the higher rate will be 44% and the additional rate will be 49%. Mercifully for business owners, dividends are excluded from this increase.
   • Increase to the trading allowance – currently £1,000, from April 2027 this will rise to £3,000. This can apply to established sole trade businesses in tax year where actual expenditure is less than £3,000, as well to certain types of ad-hoc receipts and other miscellaneous income received.
   • Business Asset Disposal Relief (“BADR”) – once set at a lofty £10,000,000, the lifetime limit will now decrease from £1m to £500,000. BADR now provides an 18% tax rate on eligible gains.
   • Founders’ Relief – seemingly the spiritual successor to the now heavily watered down BADR, this new relief will allow a 10% tax rate on up to £10m of eligible lifetime capital gains from April 2027. The qualifying criteria is much tighter than the conditions that currently must be satisfied for a disposal to qualify for BADR.
   • Lump sum pension death benefits – The requirement that scheme administrators must pay death benefits to beneficiaries within two years of learning of the death of a member aged under 75 (the ‘two-year rule’) to preserve tax-free status is being removed. The stakeholder group standing most likely to benefit here is members of the civil service pension scheme, where administrative issues make the likelihood of death benefit payments being made within two years slim.
   • Serious ill-health pension lump sums – changes to the definition of ‘registered medical practitioner’ and the terminal-illness test mean that scheme administrators will be able to accept a terminal illness diagnosis in a wider range of circumstances (including where the practitioner is outside of the UK). This will make it less restrictive on when a sum (potentially tax-free subject to the status of the individual member) can be issued under these rules.
   • ‘Timely payments’ for self-assessment – the consultation response was published in respect of the proposed overhaul of payments on account. Details are still scant, but from April 2029 taxpayers in self-assessment will need to make smaller, but more frequent payments towards their tax bill, with the ability to opt into collection via-PAYE sources or direct debit.  The policy paper confirms more detail will be provided next year, which hopefully will confirm the frequency of these payments.
   • Making Tax Digital for Income Tax (“MTDIT”) – taxpayers mandated into MTDIT from April 2027 (the cohort of taxpayers with income of £30,000 or more from rental or self-employment) will not receive any penalty points for the first four quarterly updates for the 2027/28 tax year. The budget document also states: “The government is also deferring the roll-out of Making Tax Digital for Income Tax to several taxpayer groups until further notice”.  Whether this includes the group of taxpayers with income from MTDIT sources over £20,000 is not yet known.
2. Businesses
   • Capital allowances – the rate at which residual expenditure in the main pool is relieved will decrease from 14% to 12% from April 2027.
   • Minimum wage – on 1 April 2027, the National Living Wage will increase by 3.9% to £13.21 per hour and a similar 3.9% increase to National Minimum Wage rates.
   • Research and Development Tax Relief – the Government will remove the R&D tax credit Claim Notification Form from 1 April 2027 and simplify the Additional Information Form from autumn 2027.
   • Business Rates Relief – The valuation threshold for small business rate relief for retail, hospitality and leisure properties is being increased from £12,000 to £18,000 for 100% relief, and from £15,000 to £21,000 for tapered relief from 1‌‌‌ April‌‌‌ 2027.
   • e-Invoicing – a roadmap for the implementation of e-Invoicing was included amongst the budget tax documents. At budget 2025, e-Invoicing was announced as being mandatory from 1 April 2029. This may seem a small change, but it is something that should not be ignored, as the intention is that all VAT invoices must be presented in a digitally readable standardised format.  The implementation may require new invoicing software or billing processes. The Government is also seeking views on whether there may be circumstances in which HMRC could also receive invoice data directly.
   • Close company reporting – the consultation responses have been collated, and the Government have decided not to proceed with additional reporting requirements (more detailed and potentially onerous tax disclosure of director loan movements and dividends from family and owner-managed businesses). Churchgates being amongst many others in the profession who responded to the initial consultation document.  That said, the budget confirms that standardisation of Corporation Tax computations and further digitalisation of the Corporation Tax system is on the cards.
   • Approved Mileage Payments rates – the AMAP rates have been altered, with the 55p rate per business mile (for the first 10,000 miles) being made permanent and the rate thereafter being increased to 35p per mile.
   • Mandated direct debits for VAT/PAYE – those registered for VAT and PAYE will, from April 2029, have to have in place a direct debit instruction covering these taxes as HMRC look to make direct debit payment the default collection method.
   • Modernising the ‘distributions framework’ – there was speculation before the budget that the Chancellor could put in place measures with effect from budget day that would impact on certain arrangements involving preference shares, but this did not transpire. Although the consultation responses from an earlier call for evidence have now been published.  A ‘technical consultation’ will now take place in 2027 with the new rules to take commence in 2028.  Based on the consultation response, expect a tightening of the ‘transactions in securities’ anti-avoidance rules and company purchase of own shares rules.
   • EMI2 – CSOP is now rebranded as ‘EMI2’ (although confusingly it will retain its CSOP moniker within the tax legislation) and the individual limit will double from £60,000 to £120,000, alongside alterations to how the EMI2/CSOP and EMI schemes interact and also an increase in the maximum period for exercising EMI2/CSOP options to 15 years.

To use the analogy ‘wide as an ocean, deep as a puddle’ would not be entirely fair, as some of the announcements are deceptively detailed (CGT founders’ relief for example).  Many of these policies will be padded out when further detail is released, but it is only then, once we have ferreted through the additional detail, that we can properly see how the land lies after this Budget.

Until then, if you would like to know how the announcements in the budget might impact on your personal finances or those of your business, please get in touch with any of your usual contacts at Churchgates.