Corporation Tax Changes From April 2026
April 2026 at a glance
HMRC has confirmed two headline changes affecting limited company contractors from April 2026. Fixed late filing penalties for corporation tax returns will be doubled from 1 April 2026, restoring their real terms value after remaining unchanged since 1998. In addition, the temporary Section 455 tax charge applied to outstanding directors’ loans will rise from 33.75% to 35.75% from 6 April 2026, in line with the dividend upper rate. The main and small profits corporation tax rates remain at 25% and 19% respectively.
What the new rules mean for filings and loans
From 1 April 2026, a company that files its corporation tax return late will face a higher upfront cost. The fixed penalty for a late return will increase from £100 to £200. If the return is more than three months late, the follow-on fixed penalty will also double from £100 to £200. Where a company has three successive late filings, the escalated fixed penalties will move from £500 each to £1,000 each. HMRC says these updates restore the penalties to their original value in real terms, as the amounts have not been uprated since 1998. For contractors who occasionally miss a deadline, the immediate impact will be an extra £100 to £200 per delay; for those with repeated non-compliance, the cumulative cost could become materially more punitive, particularly when combined with tax-geared surcharges that can apply after longer delays.
A directors’ loan arises when a director takes money from the company that is not salary, dividend, or a legitimate business expense, and the balance is tracked through the directors’ loan account. If the account is overdrawn at the company’s year end and is not fully repaid within nine months, a temporary corporation tax charge under Section 455 becomes payable by the company. This charge is designed to discourage owners from leaving company funds outstanding as quasi-personal borrowing. The company can reclaim the Section 455 tax once the loan is repaid, but the cash remains tied up with HMRC until repayment and the reclaim window has passed, which can create a meaningful cash flow drag for small businesses. Keeping the directors’ loan account under regular review and documenting any drawings and repayments promptly helps avoid unplanned tax costs.
From 6 April 2026, the Section 455 rate will rise from 33.75% to 35.75%, maintaining alignment with the dividend upper rate of income tax. On a £20,000 loan not cleared within nine months of the year end, the Section 455 payable at the current rate would be £6,750. At the new rate, the charge would be £7,150, an increase of £400. Although the charge is refundable after the loan is repaid, the higher rate increases the upfront cash locked away with HMRC, lengthening or deepening any working capital squeeze for companies that rely on retained profits to fund operations. Directors should therefore plan earlier repayments, consider formal dividends where distributable reserves exist, or restructure drawings to avoid tipping the account into an overdrawn position near the year end.
Notably, the headline corporation tax rates are not changing in April 2026. The main rate remains at 25% and the small profits rate at 19%. The April changes focus instead on compliance and anti-avoidance levers - higher fixed penalties to deter late filing and a higher Section 455 rate to discourage prolonged director borrowing from company funds. For contractors, the overall tax burden may not shift if filings are prompt and directors’ loans are cleared on time, but the cost of mistakes or poor cash flow housekeeping will be steeper and more immediate.
Practical takeaways for UK contractors
Contractors should tighten compliance calendars well ahead of 1 April 2026 to eliminate avoidable late filing costs, especially where previous years have slipped. Review directors’ loan accounts monthly, not just at year end, and build repayment plans to clear balances within nine months of the period end. Where profits and reserves allow, consider declaring dividends rather than taking ad hoc drawings, ensuring all formalities are met so payments are not treated as loans. If a loan looks unavoidable, forecast the Section 455 charge at 35.75% from April 2026 and model cash flow so the company can absorb the temporary outlay. Engaging a qualified accountant to monitor deadlines, prepare returns early, and advise on the interaction between dividends, salary, and loan balances will reduce risk and smooth cash demands. Contractor News reiterates that while the penalties and Section 455 charge can be reclaimed or avoided with good discipline, repeated non-compliance quickly compounds into significant, and unnecessary, costs. This content is provided for general information purposes only and should not be relied upon as tax or legal advice. Professional advice tailored to your individual circumstances should always be obtained before taking action.
