Announcements on Company Tax changes that didn’t make the Budget headlines.

In 2024 the government laid out a corporation tax roadmap, identifying that the main rate of corporation tax at 25% was here to stay as well as full expensing which was made permanent in that budget. So, it came as... Read more

In 2024 the government laid out a corporation tax roadmap, identifying that the main rate of corporation tax at 25% was here to stay as well as full expensing which was made permanent in that budget.

So, it came as no surprise that there were no major announcements for corporation tax this year in the budget. But there were some changes that company owners should be aware of.

Loans to participators – tax charge

Many owner managed businesses will use a director’s loan account to lend money to and from the company, and if the company loans money to the director that is not repaid within the year or 9 months after the year end, there is a corporation tax charge that arises on the outstanding loan balance, commonly known as the Section 455 tax charge.

The Section 455 tax charge is repayable when the loan is paid, but the repayment only comes at the usual tax payment date of 9 months and 1 day after the year end, so the charge can cause significant cash flow issues for businesses.

Whilst there was no announcement of a change to the Section 455 rate of tax in the budget, the rate of tax did in fact increase. The rate of tax is linked to the dividend rate of tax, since if the directors did not have a loan, they would have to withdraw profits as dividends. The higher rate of dividends tax increases by 2% from April 2026, and thus so does the rate of Section 455 tax from April 2026 to the new rate of 35.75% (currently 33.75%).

Employee Ownership Trusts (EOTs)

The Chancellor announced that the tax relief on these tax advantaged schemes for founders to exit would be reduced from 100% relief from capital gains tax to just 50% and that change also applies from the budget date, so that any transactions in progress would be caught by the reduced threshold.

What wasn’t explained in the announcements was that although the relief from CGT is reduced to 50%, EOTs are also no longer eligible for Business Asset Disposal Relief, even if all the other conditions are met. So that the effective rate of capital gains tax on a disposal to an EOT is likely 12% (being 50% of 24% main rate of CGT) which is still lower than the current BADR rate of 14% which is also increasing to 18% from April 2026.

Incorporation relief

When a sole trader or partnership decides to incorporate their business and transfer the trade and assets into a limited company, it is often the case that they are able to use incorporation relief to defer the gain on the disposal of the business so that incorporation, a natural progression for a business, does not crystallise large tax charges.

Another subtle change in the budget that wasn’t announced is that incorporation relief is no longer automatic and must be claimed by the transferor(s). Without the claim, the capital gains tax charges would apply.

Digital prompts

The roadmap in 2024 outlined that there would be changes to bring in digitalization for corporation tax, and we largely interpreted that as meaning Making Tax Digital would be introduced for corporation tax. However, there are no current plans to bring in MTD for corporation tax.

Announced at this year’s budget, was an intention to introduce digital prompts. Digital prompts would be through the software that is used to file the company tax returns, with notifications to prompt about filing and payment deadlines approaching. Details on how this would work aren’t yet available.

Late filing penalty charges

From April 2026, the government are also moving to increase the late filing penalty charges for corporation tax returns. The current £100 penalty for 1 day late, will be doubled to £200, similarly the £100 penalty for 3 months late will be doubled. Those flat rate penalties currently increase to £500 if the returns are filed late 3 years in a row, but that penalty will also increase to £1,000.

Capital allowances

Rachel Reeves announced a new First Year Allowance of 40% that will be introduced to provide tax relief for capital expenditure. This allowance applies to all businesses, not just companies but is restricted to include only new items, and not cars.

This new tax relief will only benefit a small amount of businesses since the Annual Investment Allowance and Full Expensing both remain to give 100% relief on expenditure. But there may be instances where these are fully utilised, not available or not preferred.

For help navigating the changes and how they affect you or your company, please do get in touch with me, Clair Dart.

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