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What happens when you underpay tax?
The new tax year has recently begun and it is a time when businesses and individuals will need to review their position to ensure that they are not caught out by shifting rules and fiscal drag.
It is also the time to look back on how taxes were handled in the previous year and this might come with a sinking feeling that something is not quite right.
If you spot an error in how you calculated your tax and fear that you may have underpaid, then it is vital you understand what to do now.
What should I do if I have underpaid tax?
Underpaying tax is an issue that can affect both businesses and individuals alike.
Larger businesses tend to be more compliant as they utilise accounting experts to ensure that they keep pace with new tax regulations as they get introduced and have dedicated teams crunching the numbers. SMEs historically struggle to keep up with tax requirements, with HMRC noting that the tax gap for small businesses Corporation Tax is 40.1 per cent of the small businesses theoretical Corporation Tax liability, or £14.7 billion in absolute terms, in the 2023 to 2024 tax year.
For individuals, dividend tax and stamp duty land tax seem to be areas that frequently make the news for their seeming difficulty in paying accurately.
In both instances, the errors are often attributed to a lack of understanding of how the tax system works or the reliance on dubious advice.
Where you become aware of having underpaid tax, you should not view this as a victory over HMRC, as they will discover the error on their own terms eventually.
Instead, it is vital that you make a voluntary disclosure at the earliest possible opportunity.
By owning up to your mistake, you will show honesty and integrity that HMRC appreciate and they will be less likely to pursue severe action against you.
HMRC’s Digital Disclosure Service (DDS) will generally be the best course of action to manage any reports of underpaid tax, but if you are a business owner who suspects that fraud may have occurred, then it may be better to use HMRC’s Contractual Disclosure Facility (CDF).
The CDF will allow you to alert HMRC to the crime without implicating yourself – unless it comes to light that you were directly involved in it.
How can I stay compliant with tax this year?
The new tax year is a chance for a fresh start as you get another chance to submit all of your annual requirements.
Seeking professional financial support is imperative in ensuring accuracy, particularly if your estate or business is complex.
Small businesses and individuals often try to power through without expert help and this results in the situations we have discussed here.
Instead of rolling the dice and hoping that you get things right, our expert team can review your tax obligations so that you can pay what you owe when you owe it.
Beyond this, seeking professional support may help you to lower your tax bill as you become aware of reliefs and more tax-efficient structures that may otherwise have passed you by.
Tax does not need to be difficult and should not cause you to become stressed about the accuracy of your bills.
Speak to our team for confidence in managing your tax obligations.
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We are officially a few days into the 2026/27 tax year and directors need to be positive on how the latest reforms affect them.
Company tax returns and accounts have gone digital
HMRC and Companies House have confirmed that from 1 April, all businesses must use compliant, commercial software to file their company’s tax returns.
As of 31 March, the free joint online service, commonly known as the CATO portal, from these two Government bodies has been removed and you must now use software to file company tax returns to HMRC.
For the time being, you will still be able to file annual accounts at Companies House using third-party software, WebFiling services or paper filing.
The decision has been made to end this service as it is “outdated and no longer aligns with modern digital standards”, according to Companies House.
This change is in line with the introduction of the Economic Crime and Corporate Transparency Act, which implemented “enhanced corporation tax requirements and changes to UK company law.”
It also follows on from a major IT security breach at Companies House, identified in March 2026, that exposed the WebFiling system and allowed some users to potentially access and amend the details of other companies.
Although the breach has now been resolved and security strengthened, it has raised concerns about the reliability of GOV.UK One Login service.
Can you still amend previous returns using the free service?
HMRC and Companies House have confirmed that now that the free filing service has closed, company directors will have to use commercial tax software if they need to make changes to a previously submitted Corporation Tax return or refile a rejected return.
From now onwards, any previously filed financial information will no longer be available in the system, as it has not been retained and will need to be entered again.
HMRC has said that, for amendments, it will also be acceptable to send a paper return to the Corporation Tax Services office.
If you have previously filed financial accounts with Companies House and you want to make changes or corrections, this will also need to be done via commercial software or by sending paper accounts to Companies House via post.
Are there any exceptions to this new rule?
Companies can file a paper Corporation Tax return only in limited circumstances, such as if they wish to submit it in Welsh or can demonstrate a valid, reasonable excuse to HMRC. Otherwise, returns must be filed online using commercial software.
Capital allowances – New rules for a new tax year
Capital allowances continue to provide an effective method for businesses to reduce their tax bills, by providing incentives for investment in eligible expenditure – typically plant and machinery.
Historically, these reliefs have been subject to change and the 2026/27 tax year is no different, as the Government moves to alter two key reliefs – Writing Down Allowance (WDA) and a new First-Year Allowance (FYA).
Reduction of the Writing Down Allowance
The WDA will be reduced from 18 per cent to 14 per cent on the main pool of qualifying plant and machinery assets.
This change has been introduced on two different dates, starting with companies subject to Corporation Tax on 1 April and followed shortly thereafter by those subject to Income Tax, such as sole traders and partnerships, from 6 April.
Businesses with large brought forward main pool expenditures are expected to lose the most from the reduction in the main rate of WDA.
In the long-term, the change may also reduce incentives for investment in second-hand assets and cars, which benefited under the previous rules.
The new First-Year Allowance
To offset some of the impact of the reduction in WDA, a new 40 per cent FYA on main rate expenditure, primarily still covering plant and machinery, will now be available.
This new FYA is intended to encourage investment in areas where other FYAs don’t allow, in particular, assets bought by unincorporated businesses and leases.
Sole traders and partnerships will, for the first time, be able to get additional support at the point of investment, which means that more businesses will be able to reduce their tax bill in the same year as their investment.
This is expected to give a quick cashflow boost to those affected and provide additional support for future investments.
However, it is important to note that this FYA does not support investment in second-hand assets, cars or leased assets in other countries.
It is also worth noting that the Annual Investment Allowance (AIA) of £1m remains. This means that the new 40 per cent FYA will only apply to companies that have a capital spend in excess of £1m.
Finally, the Government has also confirmed that small business owners will continue to benefit from tax relief on electric vehicles, as the 100 per cent FYA for zero-emission
vehicles and charge points has been extended until 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax.
This gives businesses greater certainty when planning ahead, while also providing a strong financial incentive to invest by reducing tax bills upfront.
Want to make more of capital allowances?
If you think you may be eligible for capital allowances, either due to the changes outlined in this article or more generally, then it is important that you claim the tax relief available to you.
Making Tax Digital for Income Tax is now live – What next?
For landlords and sole traders bringing in qualifying annual income over £50,000 (not including profit or dividends), Making Tax Digital (MTD) for Income Tax is now mandatory.
For income to qualify, it must be earned from self-employment or property rental, exceed the threshold in a tax year and be subject to UK Income Tax.
Please note that the total income is calculated before deducting expenses, tax or allowances.
Important dates to remember
HMRC requires quarterly updates to be submitted one month after the end of each period.
For a standard tax year, the deadlines fall on:
- 7 August
- 7 November
- 7 February
- 7 May
How to stay compliant
To stay compliant, you should take each of the following steps:
- Check your income level to see if you exceed the £50,000 threshold.
- Choose which MTD compliant software to use.
- Test your reporting processes to identify any potential issues and resolve them accordingly.
- Submit quarterly updates of your income and expenses to HMRC.
- Keep digital records.
- Submit a final declaration by 31 January following the tax year end.
MTD for Income Tax will be compulsory for landlords and sole traders whose qualifying income exceeds £30,000 from April 2027 and will be expanded further to landlords and sole traders with qualifying income that exceeds £20,000 in April 2028.
The dividend rules are changing – Disclosure rules on tax returns and new rates
From the end of the 2025/26 tax year, 5 April 2026, you must report your dividend income accurately as part of wider personal tax reforms.
Directors of close companies must disclose the company name, registration number, specific dividend amounts and their highest percentage shareholding on Self-Assessment returns.
Dividends from your own company must also be shown separately from other income.
Dividend tax rates for 2026/27
For the 2026/27 tax year, commencing 6 April 2026, two dividend tax rates will increase by two percentage points:
- Basic rate rises to 10.75 per cent
- Higher rate rises to 35.75 per cent
There is currently no increase for additional rate taxpayers, who will continue to pay dividend tax at a 39.35 per cent.
The annual dividend allowance also remains at £500 and applies to all rates.
Dividends continue to offer a tax advantage over salary in most cases, although the difference between the two is reducing.
Directors should review how profits are taken and consider whether the current mix of salary and dividends remains appropriate.
Who has to report dividend tax?
Dividend tax most commonly applies to shareholders and company directors.
Individuals receiving dividends outside of an ISA or pension over the £500 allowance threshold must report them to HMRC.
Anyone who receives more than £10,000 in dividends may be required to submit a Self-Assessment tax return.
Reviewing your position
If you have concerns about dividend taxation or wider financial pressures, we can review your tax position, explain the latest changes from HMRC and help you create a bespoke plan to meet your personal financial goals.
Looking to understand and protect your finances? Speak to our experts.
Government abolishes work-from-home relief
Directors and employees claiming work-from-home tax relief will no longer be able to claim it from the start of the new tax year – 6 April 2026.
Why is this relief being taken away?
The Chancellor announced the removal of the work-from-home relief as part of her latest Autumn Budget.
The main reasoning given for the abolition is that it will support the nation’s deficit reduction.
HMRC has also said that it no longer believes it is fit for purpose or easy to police.
Who could claim work-from-home relief?
Work-from-home relief has been utilised by homeworkers since the early 2000s, helping them offset some of the costs of heating, lighting, broadband and other home-office expenses required to complete their jobs.
The relief allowed employees and directors to claim a flat rate of £6 per week or a deduction for actual costs.
However, those who do not claim the flat fee were required to provide evidence of the exact costs, such as an invoice or bill.
Eligibility for the relief only applied to individuals who had no other choice but to work from home.
For instance, where the business did not have an office or the daily commute was not feasible. Individuals who simply preferred to work from home did not qualify.
Is there any relief still available for home workers?
The only remaining tax-free support will be reimbursements made directly by employers.
This applies only where the payments relate to demonstrated additional household costs and where the costs are incurred wholly, exclusively and necessarily for employment duties.
For anyone still claiming work-from-home relief, it is worth reviewing your position now to understand how this abolishment will impact your take-home pay.
Close companies face additional reporting requirements
Further administrative changes are on the cards for close companies, as the Government seeks to gain a better understanding of previously difficult-to-distinguish transactions.
Close companies – those companies controlled by five or fewer participators or by their directors if those directors are participators – may soon need to disclose details of transactions with participators in order to stay compliant.
A full definition of who qualifies as a participator can be found in CTM60107, but they will generally be shareholders or directors.
A business is controlled by a participator when the participator has voting power, share capital of the company and rights to capital on winding up.
It is worth understanding which transactions may be impacted and how this could change reporting requirements.
Which reporting requirements might change?
The proposed changes will cover a range of transactions, including:
- Cash withdrawals
- Loans
- Debts
- Dividends
- Other distributions and transfers of assets to and from the company
It will exclude items that are already reported to HMRC, meaning that the changes will not result in a doubling up of administrative tasks.
To comply with the changes, close companies must provide details concerning the amount transacted, the date and the details of the recipient, including their name, address and national insurance number.
Why are these changes being introduced?
There is no guarantee that these changes will be introduced, as they are currently under public consultation.
However, there is a belief that transactions between close companies and their participators may be an area that is vulnerable to tax loss due to high levels of error and fraud.
Small businesses are seen as being particularly vulnerable to the tax gap, i.e. the difference between the amount of tax owed and the amount collected. They continue to be the focus of scrutiny and tax reform.
As these proposals are still under consultation, there is no clear indication of how and when the reports will need to be made.
The anticipated implementation will see the establishment of an annual reporting cycle that will be tied to the existing company tax return.
This should mean that the obligations will be easier to track, as they will not be an additional requirement.
Our team can help you understand your obligations and keep you updated on the outcome of the consultation.
Speak to our team to take the stress out of company tax compliance.