As we head into 2026, many small business owners across the UK are trying to make sense of the latest tax changes. On the surface, it might not look too dramatic, headline rates like corporation tax haven’t suddenly jumped. But when you look a little closer, the way tax thresholds and allowances are structured means the real impact on small businesses could be greater than it first appears.
In the Autumn Budget 2025, the government confirmed that key income tax and National Insurance thresholds will stay frozen until at least April 2031. In simple terms, this means personal allowances, basic and higher rate tax bands, and main National Insurance thresholds won’t increase in line with inflation over the next few years.
At first glance, “no change” might sound like good news. However, as wages and business income gradually rise with inflation, those frozen thresholds start to bite. More of your income can slip into higher tax bands without you necessarily feeling any better off. This is often referred to as fiscal drag, and over time, it can mean business owners, directors and employees end up paying more tax, even if their actual spending power hasn’t improved.
What This Means for Small Businesses
Unlike large corporations with specialist tax teams, small and medium-sized enterprises (SMEs) often feel the effects of frozen thresholds more acutely.
Here’s why:
1. Higher Tax Burden Over Time
As turnover and salaries creep up with inflation, more income becomes taxable at higher rates because the thresholds that shield parts of that income haven’t increased. For example, if a business owner’s salary rises modestly year-on-year, they could suddenly find themselves in a higher tax or NIC band without an actual increase in their spending power.
2. National Insurance Contributions (NICs)
Employer NICs, the amount businesses must pay toward employees’ National Insurance, are now calculated from a lower threshold and at a slightly higher rate compared to a couple of years ago. These changes mean overall labour costs have increased, which can be a challenge for small businesses with tight margins.
3. Dividend Tax and Profit Extraction
Dividend tax rates are also set to change. From April 2026, both basic and higher rate dividend taxes rise by two percentage points. This affects owner- managed businesses that extract profits through dividends, making careful tax planning more important than ever.
Making Tax Digital (MTD)
Another big shift in 2026 is the rollout of Making Tax Digital for Income Tax. From April 2026, sole traders and landlords earning more than £50,000 must submit their income tax information digitally on a quarterly basis. This represents a significant change in how tax returns are managed and increases the administrative burden if it isn’t planned for.
Why Small Businesses Should Act Now
With all of these changes happening, it’s worth getting ahead of things rather than leaving tax planning until the end of the year. A few sensible steps taken now can make a real difference and help reduce the longer-term impact of frozen thresholds and gradually increasing tax bills.
It’s a good time to review your payroll and salary strategy. Even small pay rises can push income into higher tax or National Insurance bands when thresholds are frozen, so thinking carefully about timing and structure can help you stay tax-efficient.
If you’re a business owner who takes income through dividends, it’s also wise to revisit your dividend strategy. With dividend tax rates shifting, reviewing how and when you extract profits could help protect your overall take-home income.
And don’t forget about Making Tax Digital. If the new reporting requirements apply to you, preparing early will make the transition much smoother and reduce the risk of last-minute stress or unexpected issues with HMRC.
In conclusion the 2026 tax threshold changes might not seem dramatic at first glance, but their impact can build up over time. Staying informed and planning ahead with your accountant can help you stay in control, protect your profits, and keep your business financially healthy.
At MW Accounting, our Milton Keynes accountants work closely with small business owners to review payroll, dividend planning and digital reporting, helping you stay ahead of tax changes with confidence. Get in touch today to find out more about the services we offer.
