What contractors and homeowners need to know about the 2026/27 tax year

There are numerous tax changes taking effect on 6th April 2026. So what are they, and how will they affect contractors and homeowners?

1. Dividend tax increase – a direct hit for PSC contractors

From 6 April 2026, the dividend ordinary rate rises from 8.75% to 10.75%, and the dividend upper rate rises from 33.75% to 35.75%. The additional rate remains unchanged at 39.35%. The £500 dividend allowance is also unchanged.

It is Personal Service Company (PSC) directors – those who take on commercial risk without the cushions of employment protection – who will bear the brunt of this increase, as HM Treasury taps a source of politically popular revenue.

For a typical contractor drawing the standard £12,570 salary and £37,700 in dividends, the rise means approximately £750 more in dividend tax each year. The hike is expected to raise £2.1 billion in total.

In combination with frozen personal allowances until 2031, the dividend allowance having already been shredded from £5,000 to £500 over successive budgets, this rate rise represents another part of the cumulative squeeze for PSC contractors.

For contractors planning a move or refinance, it’s also worth understanding how lenders assess contractor income and affordability before these changes take effect.

2. Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) – affects landlords and the self-employed

From 6 April 2026, self-employed individuals and landlords earning over £50,000 per year must comply with Making Tax Digital for Income Tax Self-Assessment. They will be required to maintain digital records, use HMRC-approved software, and submit tax information quarterly, rather than through a single annual Self-Assessment return.

The threshold then falls in stages: to £30,000 in April 2027, and £20,000 in April 2028. By 2028, nearly three million taxpayers are expected to fall within the regime.

Income from employment (PAYE) or a pension is not included in the qualifying income threshold – only self-employed income and rental income count. If a landlord owns a property jointly, the gross income is halved (assuming 50:50 ownership) for threshold purposes.

This is a significant operational change for any landlord who currently files a simple self-assessment return, and directly relevant to contractor-landlords with both trading and property income – who will need to submit separate quarterly updates for each income source.

With more frequent reporting requirements, keeping clean and consistent financial records becomes even more important – especially when preparing for a mortgage application. You can read more about what mortgage lenders seek in self-employed applicants here.

3. Capital Gains Tax – Business Asset Disposal Relief rate increase

From 6 April 2026, the CGT rate applying to qualifying disposals under Business Asset Disposal Relief (and Investors’ Relief) increases from 14% to 18%. As an example, applying the rise to a qualifying gain of £250,000 would see a £10,000 increase from £35,000 to £45,000.

For contractors winding up their PSC, selling their business, or disposing of qualifying shares in the near term, this unwelcome change needs to be considered.

For those planning an exit or restructuring, timing can also affect your ability to secure lending. If you’re considering your next move, it’s worth reviewing your mortgage options as a limited company contractor before making any decisions.

4. Incorporation relief for landlords – now requires active claiming

Prior to 6 April 2026, incorporation relief (which allows landlords to transfer a property business into a limited company and defer Capital Gains Tax) was granted automatically. From that date, landlords are required to actively claim the relief.

This is being presented as a compliance improvement, but it will flag incorporation activity to HMRC and invite scrutiny. Any landlord currently planning a property incorporation needs to act with this change fully in mind.

This is particularly important for contractor-landlords, as rental income is assessed differently by lenders and can impact overall borrowing capacity. Understanding how buy-to-let mortgages work for contractors can help you plan ahead.

5. Capital allowances writing-down rate cut – relevant for some contractor companies

The main rate of writing-down allowance for plant or machinery is being cut from 18% to 14% from April 2026, effectively raising the tax burden for businesses with qualifying assets. However, a new 40% first-year allowance for main rate assets is being introduced from 1 January 2026, benefiting businesses unable to claim full expensing – including unincorporated businesses and leasing firms.

This is not directly relevant to the typical PSC contractor, but may be material for contractors in construction, engineering, or capital-intensive sectors who hold equipment through their limited company.

6. Home working allowance – quietly withdrawn for employees

From 6 April 2026, employees will no longer be able to claim the £6 per week flat-rate home working allowance directly from HMRC.

This affects umbrella and PAYE contractors in particular, who have relied on this relief during hybrid and remote working arrangements. It is a small but irritating removal of a benefit that became standard practice post-pandemic.

For those working through umbrella companies, this is another factor affecting overall affordability. If you’re unsure how your income is assessed, it’s worth understanding how umbrella company employees are treated by mortgage lenders, particularly when it comes to payslips, day rates, and continuity of work.

7. Fiscal drag – the silent tax rise continuing all the way to 2031

Not a new change as such, but worth flagging for context: income tax thresholds remain frozen and are scheduled to stay unchanged until at least April 2031. As salaries and day rates rise with inflation, a greater proportion of income is pulled into higher tax bands – a phenomenon known as fiscal drag.

For example, an employee whose salary increased from £52,500 to £55,000 pa would pay an extra £1000 in tax at the 40% rate, even though the tax rates themselves have not changed.

The bigger picture: a cumulative effect

Taken individually, some of these changes may appear modest. Taken together, they represent a sustained squeeze on contractors and the flexible workforce through higher dividend tax, frozen allowances, increased CGT rates and a growing compliance burden for those with property income.

Each measure has been calibrated to raise revenue in ways that attract limited political attention, but will sting financially for those directly in scope.

If you’re unsure how these changes could affect your borrowing position, you can read more about contractor mortgages and how lenders assess different income types or speak to a specialist advisor to review your options ahead of the new tax year – particularly if you’re planning a move or remortgage.

It is important to seek professional advice urgently if you are considering a company disposal, a property incorporation or any transaction where timing affects the tax outcome.