Category: Income Tax

Received a P800 from HMRC?

HMRC is currently carrying out its annual reconciliation of PAYE for the 2025-26 tax year. Between June and November, HMRC calculates the Income Tax paid by individuals and checks whether the correct amount has been collected. Where HMRC identifies a difference, it may issue a tax calculation letter, known as a P800.

If you receive a P800, do not automatically accept that HMRC’s calculation is correct. You should check the figures against your own records, including your employment and pension income, tax deducted and any other relevant income or tax reliefs. Errors or missing information can affect the calculation and could result in either too much or too little tax being shown as due.

HMRC provides an online service that allows taxpayers to check how much Income Tax they paid for the year ended 5 April 2026. The calculation can also be checked through the HMRC app.

A P800 may show that you have overpaid tax and are due a refund, or that you have underpaid and need to pay additional tax. In some cases, the P800 will allow you to claim a refund or pay the tax owed online.

If you are unsure whether the figures or tax calculation are correct, we can review your P800 and advise whether any action is needed.
 

Evidence required to support business expense claims

Self-employed individuals can deduct allowable business expenses from their income when calculating taxable profits. However, businesses must keep accurate records and evidence to support the costs being claimed.

HMRC requires taxpayers to keep proof of business expenses, although evidence does not usually need to be submitted with a self-assessment tax return. Records should be retained and made available if HMRC requests them as part of a compliance check.

Evidence should show the nature of the expense, the amount paid and that the cost relates to the business. This may include receipts, invoices, bank statements, contracts or other supporting documents. Where an expense has both business and private use, records should also demonstrate how the business proportion has been calculated.

Allowable expenses can include costs such as office expenses, travel, insurance, marketing, professional fees, staff costs and business premises costs. However, personal expenses cannot be claimed, and only the business element of mixed-use costs can be deducted.

Businesses should also ensure they use the correct treatment for larger purchases. Under traditional accounting, equipment, machinery and vehicles may need to be claimed through capital allowances rather than as day-to-day expenses. Under the cash basis, most equipment and machinery can be deducted as an expense, although cars are generally dealt with through capital allowances.

Is your business eligible to use cash basis accounting?

Cash basis accounting is a simplified method used by sole traders and other unincorporated businesses to work out income and expenses for self-assessment in a straightforward manner. 

The cash basis is the default method for calculating income and expenses for self-employed individuals and partnerships when completing their Income Tax self-assessment return. Businesses that prefer traditional accruals accounting, or are not eligible for cash basis, must opt out of the cash basis when submitting their return.

One of the main benefits of cash basis is that businesses only record income when payment is received and expenses when they are paid. This means they do not pay Income Tax on money they are still waiting to receive, which can help improve cash flow management.

The scheme can also simplify accounting records. Equipment purchased for business use can usually be claimed as an allowable expense rather than through capital allowances, making the process more straightforward.

Cash basis is available to sole traders and partnerships without corporate partners. However, limited companies, limited liability partnerships and certain other businesses cannot use the scheme. Traditional accounting may also be more suitable for businesses with complex arrangements, significant stock levels or those needing accounts for finance and funding purposes.
 

Making the most of the £1,000 property allowance

The £1,000 property allowance is a helpful for individuals with small amounts of property income. The allowance provides a tax exemption of up to £1,000 a year against gross property income, meaning some landlords may not need to report their income to HMRC.

The allowance applies to income from land or property, such as renting out a driveway or other small property-related income. If your total gross property income for the tax year is £1,000 or less, you will not usually need to tell HMRC or include this income on a tax return, provided you are eligible to use the allowance.

If you own property jointly with others, each person can claim their own £1,000 allowance against their share of the gross rental income. Where property income exceeds £1,000, you will normally need to declare the income and can choose whether to deduct the £1,000 allowance or claim actual allowable expenses. However, you cannot deduct more than the amount of your income to create a loss.

The property allowance cannot be claimed in certain circumstances. For example, it cannot be used where the income is from a property business connected to a company or partnership involving you or someone connected to you. It also cannot be used if you claim the tax claim  for residential property finance costs, such as mortgage interest, or if you use the Rent a Room Scheme and deduct actual expenses instead.

Claiming the correct tax relief for work mileage

Employees who use their own vehicle for business journeys may receive Mileage Allowance Payments (MAPs) from their employer. These payments can be made tax-free up to HMRC’s approved amount, calculated by multiplying business miles travelled by the relevant rate per mile.

Effective since 6 April 2026, the approved mileage rate for cars and vans increased to 55p per mile (from 45p) for the first 10,000 business miles, with 25p per mile (no change) applying above this threshold. Motorcycle mileage remains at 24p per mile and bicycle mileage at 20p per mile.

If an employer pays more than the approved amount, the excess must be reported to HMRC and taxed through payroll. If an employer pays less than the approved amount, the employee may be able to claim Mileage Allowance Relief on the unused balance.

Separate National Insurance rules apply to mileage payments. Employers may need to pay Class 1 National Insurance on amounts above the qualifying amount, although no National Insurance is due where payments are below the threshold.

There is an additional 5p per passenger per business mile for carrying fellow employees in a car or van on journeys which are also work journeys for them. Only payments specifically for carrying passengers count and there is no relief if you receive less than 5p or nothing at all.

Averaging profits if income fluctuates

Some self-employed individuals experience significant fluctuations in their profits from one year to the next. When this happens, HMRC’s averaging relief may help to regularise tax payments by levelling profits across more than one tax year.

However, the relief is only available to limited groups of taxpayers. Farmers and market gardeners can claim to average profits over either two or five consecutive tax years, while creators of literary or artistic works, such as authors, artists and composers, can average profits over two consecutive tax years.

Averaging relief is intended to reduce the impact of unusually high or low profits in a particular year. By spreading profits over the relevant period, it may reduce the amount of tax payable where income would otherwise push a taxpayer into a higher tax band or affect National Insurance liabilities.

The relief is most beneficial where your tax position differs between years. For example, it may reduce your tax bill if you pay tax at the basic rate in one year and the higher rate in another, or if your income falls below your personal allowances in one year but is taxable in another. However, it is unlikely to provide any benefit if you are already paying the highest rate of tax and Class 4 National Insurance contributions in every year being averaged.

The relief is not available to companies and generally cannot be claimed by businesses using the cash basis. Specific conditions must also be met before a claim can be made, including rules on the level of profit fluctuations between the relevant tax years.

Claims are made through self-assessment for the latest tax year. Rather than requiring earlier tax returns to be amended, HMRC adjusts the tax and National Insurance position for the claim year to reflect the averaging calculation.

If your profits vary considerably from year to year and work in a qualifying business, it is worth checking whether averaging relief is available. Claiming the relief where eligible could reduce your tax bill and provide a fairer reflection of your business profits over time.

Has a pay rise quietly increased your tax bill?

Many employees and business owners have welcomed higher earnings over the past few years. However, for a growing number of taxpayers, a larger salary does not necessarily mean significantly more money in their pocket.

The reason is a process known as fiscal drag.

Although tax rates have remained broadly unchanged, personal tax thresholds have been frozen for several years. As wages increase, more people are finding themselves paying tax at higher rates, even if their pay has only kept pace with inflation.

This means that someone who previously paid only the basic rate of Income Tax may now be paying tax at 40%, while others may have moved into the additional rate band. The effect can be surprisingly expensive, particularly when combined with the loss of valuable tax allowances.

Moving into a higher tax band can affect far more than your Income Tax bill. It may reduce your Personal Savings Allowance, increase the rate of Capital Gains Tax payable on certain assets, and expose you to the High Income Child Benefit Charge. Individuals with income above £100,000 may also begin to lose their Personal Allowance, creating an effective marginal tax rate of 60% on part of their income.

Business owners should also remember that higher personal income may affect the most tax-efficient way of extracting profits from their company. The balance between salary, dividends and pension contributions should be reviewed regularly rather than simply carried forward from previous years.

Fortunately, there are often legitimate ways to reduce your taxable income. Pension contributions remain one of the most effective planning opportunities, while Gift Aid donations can also extend the basic rate tax band. Business owners may benefit from reviewing the timing of dividends, bonuses or other income where flexibility exists.

The important point is not to assume that a higher salary automatically leaves you better off after tax. A modest increase in income can sometimes trigger unexpected tax consequences that outweigh much of the additional earnings.

If your income has increased recently, now is an excellent time to review your overall tax position. Early planning can often reduce your tax liability while ensuring you continue to make the most of the reliefs and allowances available.

If you would like us to review your personal tax position or discuss ways to improve your tax efficiency, please contact us. We will be pleased to help you identify opportunities to minimise your tax bill while remaining fully compliant with HMRC's rules.

When does a hobby become a taxable business?

Not every hobby becomes a taxable business, but it is important to be aware when this can happen. This can apply even if you are making some money from your hobby. HMRC looks at a range of factors to decide whether an activity is a genuine trade, including whether there is a business intention behind it or whether it remains a personal interest.

A hobby can gradually develop into a business, particularly where activities become more regular, organised or profit-focused. For example, repairing cars, selling collectibles or making items to sell may generate income, but this alone does not automatically mean a person is carrying on a business. HMRC considers whether the activity passes the “business test” when deciding if tax rules apply.

Small-scale or occasional sales from hobbies will not usually be treated as a business. However, where a hobby grows into a more substantial activity, it may create tax obligations. Many successful businesses have started as hobbies.

Where income does become taxable, there are two separate £1,000 tax-free allowances that may help:

• the trading allowance for income from self-employment, casual services or hiring out personal equipment
• the property allowance for gross property income, such as renting out a driveway

If either relevant allowance covers all the income from that activity, the income is tax-free and does not need to be declared. If income exceeds £1,000, the allowance can sometimes be deducted instead of actual allowable expenses when calculating taxable profits.

Understanding dividend tax

Understanding dividend tax is important for anyone who receives income from shares in a company. Dividends are taxed differently from salary, pensions and other forms of income, with their own allowances and tax rates.

For the 2026-27 tax year, individuals do not pay tax on dividend income that falls within their Personal Allowance of £12,570. In addition, there is a separate dividend allowance of £500. Dividend income received above these allowances is generally subject to tax.

The rate of tax payable depends on the individual's overall level of taxable income. For 2026-27, dividends falling within the basic rate band are taxed at 10.75%, those within the higher rate band at 35.75% and those within the additional rate band at 39.35%.

To determine the applicable rate, dividend income is added to other sources of taxable income. As a result, dividends can push an individual into a higher tax band, and different portions of the dividend income may be taxed at different rates.

Where total dividend income is £10,000 or less, an individual may ask HMRC to adjust their tax code so that any tax due is collected through their wages or pension. Alternatively, the income can be reported through a self-assessment tax return. There is normally no requirement to notify HMRC where dividend income is covered entirely by the dividend allowance.

Individuals who receive more than £10,000 in dividends must complete a self-assessment tax return. Those who do not normally file a return must register with HMRC by 5 October following the end of the tax year in which the dividend income was received.

Understanding your tax code

Your tax code tells your employer or pension provider how much Income Tax to deduct from your pay. It is set by HMRC, and you may have a different code for each job or pension.

Most people with one job (or pension) use the code 1257L, which reflects the standard Personal Allowance of £12,570. The numbers show how much tax-free income you are entitled to, while the letters explain your circumstances.

Your tax code can change if your situation changes. Common reasons include starting a new job, receiving a pension or taxable benefits, claiming Marriage Allowance, receiving company benefits, or having unpaid tax from a previous year. HMRC may also update your code if your income details are corrected.

The letters in your code provide further detail. For example, L means you receive the standard Personal Allowance, M or N relate to Marriage Allowance, and BR means income is taxed at the basic rate. Codes ending in W1, M1 or X are emergency tax codes, used when HMRC does not yet have full information.

Emergency codes tax each pay period (such as weekly or monthly) in isolation, which can temporarily lead to overpayments or underpayments of tax. These issues are usually corrected once HMRC updates your records.

A "K" prefix indicates that taxable income or deductions exceed your Personal Allowance. In these cases, your employer will apply the adjustment but cannot take more than half of your pay.

If your tax code looks wrong, you should check your details with HMRC online or through the HMRC app. Once updated, any tax difference will normally be adjusted through your next payslip.