Monthly Newsletter: January 2026

Self-Assessment Deadline Day Looking Ahead

31 January 2026 was the deadline for filing your 2024/25 Self-Assessment tax return online and paying any tax owed.

You must submit your online tax return by 31 January 2026 just before midnight or you will receive a late filing penalty.

You need to pay your Self-Assessment tax by the same deadline, or you will face payment penalties and interest charges.

Late filing penalties

Miss the deadline and the penalties start immediately:

• Day 1: Automatic £100 fine, even if you owe nothing or have already paid the tax due

• After 3 months: Daily penalties of £10 per day, up to a maximum of £900

• After 6 months: 5% of tax due or £300, whichever is greater

• After 12 months: A further 5% of tax due or £300, whichever is greater

These penalties stack up quickly. Someone who files six months late owing £5,000 could face penalties exceeding £1,500 on top of their original tax bill. The filing penalties apply regardless of whether you owe tax, even if HMRC owes you a refund, you will still be penalised for late filing.

Late payment penalties and interest

If you file on time but cannot pay, you avoid the filing penalties, but payment penalties and interest still apply:

• Interest runs from 1 February 2026 on any unpaid amount at the prevailing HMRC rate

• 5% surcharge if the tax remains unpaid after 30 days

• Further 5% surcharges at six months and twelve months after the due date

Cannot pay in full? Your options

If you are unable to pay in full by the deadline, you may be able to set up a Time to Pay arrangement online and spread the cost over monthly instalments. For tax bills of up to £30,000, this arrangement can be set up directly through your Government Gateway account without needing to speak to HMRC.

Setting up a Time to Pay arrangement before the deadline (or shortly after) can help you avoid the late payment surcharges, though interest will still accrue. The key is to engage proactively, HMRC is more amenable to those who come forward than those who bury their heads in the sand.

Paying HICBC only? You may be able to opt out

The new High Income Child Benefit Charge (HICBC) PAYE digital service means thousands of claimants who are only in Self Assessment to pay this charge can now opt to have it collected through their tax code instead. If you are only in Self Assessment because of HICBC, contact HMRC to switch to the PAYE service and simplify your obligations from next year onwards.

Our take

If you have not filed yet, do it now. Do not wait until 11pm and risk system timeouts. Last year, Barclays had a system IT failure, which resulted in many taxpayers not being able to make their tax payments on the day.

HMRC's online services experience heavy traffic on deadline day, and technical difficulties will not buy you an extension. If you cannot pay the full amount, file anyway and set up a Time to Pay arrangement. The filing penalties are automatic and avoidable; the payment penalties can be managed if you engage with HMRC promptly. 

Looking Ahead: The Changes Coming in April 2026

With Self Assessment out of the way, attention turns to the significant changes taking effect from 6 April 2026. If any of these affect you, three months is not long to prepare.

Tax year end planning – things to action before 5 April

Before focusing on what changes in April, consider what you can do now to make the most of the current tax year:

• ISA allowance: Have you used your £20,000 ISA allowance for 2025/26? This is a use-it-or-lose-it allowance that cannot be carried forward. With dividend and savings rates increasing, sheltering investment income in ISAs becomes even more valuable.

• Pension contributions: Review whether you have maximised pension contributions for the year. The annual allowance remains £60,000 (or 100% of earnings if lower), and you may be able to carry forward unused allowance from the previous three years.

• Dividend planning: If you control the timing of dividends from your company, consider whether to declare dividends before 6 April 2026 to benefit from the current lower rates (8.75%/33.75%) rather than the new rates (10.75%/35.75%). For a higher-rate taxpayer extracting £50,000 in dividends, the difference is £1,000.

• CGT annual exempt amount: The annual exempt amount remains at £3,000. If you have gains to realise, consider whether to crystallise them before 5 April to use this year's allowance.

• Gift allowances: The £3,000 annual IHT gift exemption can be carried forward for one year only. If you did not use last year's allowance, you can gift up to £6,000 before 5 April without IHT implications.

APR and BPR restrictions

The £2.5 million cap on 100% Agricultural Property Relief and Business Property Relief comes into force. The first £2.5m of qualifying business or agricultural assets remains fully exempt from IHT. Everything above that threshold qualifies for only 50% relief, which means an effective 20% IHT rate on the excess. The spousal transfer of unused allowance has been confirmed, giving married couples and civil partners up to £5 million of full relief between them.

Dividend tax increases

The basic rate on dividends rises from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. For owner-managers extracting profits via dividends, the gap between dividend and salary extraction continues to narrow. Combined with the ordering rules change from April 2027 (which will require personal allowances to be set against employment income first), dividend-based remuneration strategies need careful review.

Incorporation relief - active claim required

From 6 April 2026, incorporation relief under s162 TCGA 1992 must be actively claimed, it will no longer apply automatically. This is particularly relevant for landlords considering transferring property portfolios into a company structure. The 'business vs investment' question will face increased HMRC scrutiny under the new claims process. If you are planning an incorporation, the window before these changes take effect is narrowing.

BADR rate increase

Business Asset Disposal Relief increases to 18% (from 14%), further reducing the benefit of the £1 million lifetime allowance for qualifying business disposals. For those contemplating a sale, the maths has changed, though BADR remains better than the standard 24% higher rate.

Share Exchanges - Tightened Anti-Avoidance

The anti-avoidance rules for share-for-share exchanges and reorganisations have been significantly tightened in the recent Budget. Previously, HMRC could deny clearances if the transaction wasn't for "bona fide commercial reasons" or had tax avoidance as a main purpose.

Now, the "bona fide commercial reasons" component has been dropped entirely and HMRC can attack any "arrangements" where tax reduction is a main purpose, even when a transaction makes commercial sense.

Essentially, HMRC is targeting any cases where, as part of a commercial exchange or company reconstruction, additional arrangements have been put in place to obtain a tax advantage. 

Non-dom regime abolished and long-term residence

The remittance basis was replaced by the new Foreign Income and Gains (FIG) regime from 6 April 2025. The room for planning has curtailed here, but the transitional provisions and Temporary Repatriation Facility offer some opportunities for those with overseas income and gains, however these require careful structuring.

On the IHT side, the old domicile-based rules have been replaced with a residence-based test. From 6 April 2025, individuals become subject to UK IHT on their worldwide assets after 10 years of UK residence. Importantly, this exposure does not disappear immediately upon leaving, there is a 10-year 'tail' during which former long-term residents remain within the UK IHT net even after departing. 

For those considering their long-term position in the UK, or contemplating a move abroad, the IHT implications of residence decisions have never been more significant.

Our take

April is closer than it feels. If any of these changes affect you, now is the time to act. Review your ISA and pension contributions, consider accelerating dividend declarations, and if you are contemplating incorporation or a business sale, the clock is ticking. Contact us to review your position before options close.

IHT Planning: Last Call Before April

The Autumn Budget 2025 confirmed that the inheritance tax changes announced at Autumn Budget 2024 will proceed as planned from 6 April 2026. The £2.5 million cap on 100% APR and BPR relief, AIM shares restricted to 50% relief only, and pensions brought into the IHT net from April 2027 are all going ahead.

The key addition this year is confirmation that any unused 100% relief allowance can be transferred to surviving spouses or civil partners, including where the first death occurred before 6 April 2026. In such cases, it will be assumed that the maximum £2.5 million allowance is available for transfer. This effectively doubles the relief available for married couples and civil partners to £5 million.

The nil-rate bands remain frozen until April 2031 at £325,000 (nil-rate band) and £175,000 (residence nil-rate band). 

One helpful measure: the option to pay IHT attributable to APR/BPR property by equal, interest-free annual instalments over 10 years has been extended to all qualifying property. This assists with liquidity but does not reduce the underlying liability.

Our take

April 2026 is barely a couple of months away. The spousal transfer is a welcome concession, but it does not change the fundamental position: assets that would have passed entirely free of IHT will now face a 20% effective rate above the allowance. For a £10 million family farm or trading business, that could mean £2m in IHT that previously would not have existed.

The pensions change from April 2027 adds another layer of complexity. For clients who have been using pensions as an IHT-efficient vehicle to pass wealth to the next generation, that strategy needs urgent review.

Clients with business or agricultural assets exceeding £2.5 million (or £5 million for couples) should be acting now. Reviewing wills, considering lifetime gifting (bearing in mind the 7-year rule and transitional provisions), and exploring whether restructuring can maximise available reliefs. Waiting until April is too late.

We will be soon releasing a tool for individuals to assess their exposure to Inheritance Tax - stay tuned!

Recent Work We Have Been Advising On

Here is a snapshot of some of the issues we have been helping clients navigate.

Inheritance tax review and trust wind-up

Inheritance tax is a significant charge levied on an individual's estate on death at a rate of 40%. Several planning opportunities are available to mitigate IHT exposure and allow maximum value to be transferred to children and beneficiaries. However, these mitigation strategies must be reviewed periodically to ensure they remain fit for purpose.

A client in her late 60s approached us with a substantial estate valued at £3 million, including her main residence, investment properties, various investments (ISAs, pensions and life insurance policies). In addition, two discretionary trusts established in the 1990s held a further £580,000 in investments and cash. The trusts had been set up to mitigate IHT and provide flexibility for the family. However, the client had not reviewed these arrangements for many years.

With her children now adults and financially independent, she questioned whether the ongoing costs and complexity were still justified. Annual tax returns, trustee meetings and professional fees were costing around £3,000 per year. One trust was approaching its 10-year anniversary, which would trigger an IHT periodic charge. She wanted to simplify her affairs and allow her children to manage the assets directly.

Our approach: We carried out a comprehensive review of the client's estate and trust arrangements, including valuing all assets, reviewing the trust deeds, exploring various mitigation strategies and modelling the tax implications of different options. Our analysis confirmed that the trusts, while appropriate when established, were no longer providing significant tax benefits.

The tax implications of winding up: Winding up a discretionary trust and distributing assets to beneficiaries has several tax consequences that must be carefully managed:

• IHT exit charges: When transferring assets outside the settlement, an IHT charge applies based on the number of complete quarters since the last 10-year anniversary and the value of assets within the trust.

• CGT: Transferring assets to beneficiaries is treated as a disposal at market value for CGT purposes. However, holdover relief can defer the CGT by passing the gain to the beneficiaries, which means they inherit the trustees' base cost, so no immediate CGT liability arises. The gain only crystallises when the beneficiaries eventually sell.

• Income tax: Any undistributed income within the trust at the point of wind-up must be addressed. Income distributed to beneficiaries carries a tax credit at the trust rate of 45%, which basic and higher rate taxpayers can reclaim through self-assessment.

The critical planning point: Holdover relief under s260 TCGA 1992 is only available where the distribution is subject to an IHT exit charge. The relief requires the transfer to be chargeable to IHT, it does not matter whether any IHT is actually payable, but there must be a charge in principle. Distributions made within the first three months after an anniversary have no complete quarters elapsed, meaning no exit charge arises and therefore holdover relief cannot be claimed.

The trusts held investment portfolios with unrealised gains of approximately £85,000. At the trustee CGT rate of 24%, an immediate tax liability of approximately £20,000 would have arisen if holdover relief was not available. By timing the distributions to ensure at least one complete quarter had elapsed since the relevant anniversary dates, we secured the availability of holdover relief and deferred this liability entirely.

The outcome: Following our review, the client decided to wind up both trusts and distribute the assets directly to her children. Total trust assets distributed: £580,000.

IHT exit charges paid: £3,000. CGT deferred via holdover relief: £20,000. Annual admin costs saved going forward: £3,000 per year.

We also reviewed her life insurance arrangements. One policy worth £200,000 was not held in trust, meaning the proceeds would have formed part of her taxable estate on death. We recommended placing this policy into trust, reducing her potential IHT liability by £80,000 (£200,000 × 40%).

The takeaway: Trusts established many years ago may no longer be the most tax-efficient structure. Regular reviews are essential, particularly following changes to legislation. Winding up a discretionary trust has IHT, CGT and income tax implications, these need to be balanced carefully to achieve the best overall outcome. And timing is critical; getting it right can defer significant tax liabilities.

R&D tax relief for polymer recycling innovation

A UK-based plastics manufacturer approached us to review their R&D tax relief position. The company produces recycled polyethylene terephthalate (rPET) sheeting for the food packaging industry, employing around 25 staff with turnover approaching £10 million. They qualified as an SME for R&D purposes, with no subsidies or grants towards their development work.

The projects: The claim covered four distinct R&D projects, each addressing genuine scientific or technological uncertainty:

• FSA regulatory compliance: New Food Standards Agency regulations effective July 2023 prohibited the standard virgin capping layer structure. The company had to develop a commercially viable process and materials mix to meet the new requirements; ultimately achieving FSA approval for their specific Infrared Dryer machine configuration.

• Dust contamination: Identifying the causes of optical anomalies creating market resistance, despite the rPET meeting hygiene standards. Resolution required independent microscopic analysis and installation of real-time impurity monitoring systems.

• IRD system repurposing: Testing whether existing drying equipment could be repurposed as a cleaning device to meet anticipated 2025 EFSA regulations which were resolved through systematic challenge testing with laboratory collaboration.

• Material quality challenges: Developing processes to remove new contaminants caused by supply chain material shortages, without significant capital expenditure.

Our approach: The success of the claim relied on detailed dialogue with the client's technical professionals to ensure the projects genuinely sought to resolve scientific or technological uncertainty. We validated that sufficient supporting records existed and that the narrative would withstand HMRC scrutiny. The level of detail needed to prove the work was non-trivial and represented an actual advance in the industry, not routine product development.

Cost treatment followed the legislation strictly: employee time on qualifying R&D activities (including indirect activities per CIRD83000), materials consumed in resolving uncertainties, and appropriately apportioned utilities. We took a conservative approach throughout, where every cost included had ample evidence to support its inclusion, reinforcing the credibility of the submission.

The outcome: Total qualifying R&D expenditure for the period exceeded £600,000, comprising approximately £175,000 of employee costs, £400,000 of consumables, and £40,000 of utilities. The detailed technical report and Additional Information Form were submitted to HMRC, supporting a significant tax relief claim for the client.

The takeaway: R&D tax relief is not just for tech companies. Manufacturers facing regulatory change, supply chain challenges, or process improvements may well be undertaking qualifying R&D without realising it. The key is proper documentation and alignment with HMRC's technical guidelines, getting this right can result in substantial tax savings.

Questions? Get in touch.

If any of the issues in this newsletter affect you, contact us to discuss your options at taxadvisory@aswatax.co.uk