SME Accounting News & Deep Dives: MTD Auto-Enrolment Begins, VAT Cut on Electricity & Earlier Tax Payment Plans

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Author: Richard Published: Monday 24 August 2026

Welcome to this week’s SME Accounting News & Deep Dives. This edition covers Making Tax Digital auto-enrolment, the upcoming VAT cut on qualifying electricity, proposals for earlier and more automated tax payments, and corporation tax planning ahead of the 28 October 2026 Budget.

These changes matter particularly to limited companies and growing SMEs. Even if your company accounts are handled separately, directors may also have personal property or sole-trader income that brings them into new reporting requirements.

1. HMRC will begin auto-enrolling eligible taxpayers into MTD

From September 2026, HMRC will begin signing up eligible sole traders and landlords who have not joined Making Tax Digital for Income Tax themselves.

The initial group includes taxpayers whose combined gross income from self-employment and property was more than £50,000 in 2024/25. MTD for Income Tax became mandatory for this group from 6 April 2026.

The first quarterly update covered the period from 6 April to 5 July 2026 and was due by 7 August 2026. HMRC’s deadline announcement confirms that quarterly updates are not tax returns. They are summaries of income and expenses submitted through compatible software.

What this means for SMEs

Although MTD for Income Tax applies to sole traders and landlords rather than limited companies, it is relevant to many company directors.

For example, you may:

• Run a limited company and also own a rental property.

• Have a separate sole-trader consultancy alongside your company.

• Receive property income jointly with a spouse or civil partner.

• Use a company for one activity while carrying out another personally.

If your combined gross self-employment and property income exceeded £50,000 in 2024/25, check whether you are affected.

Do not wait for HMRC to complete the process. Signing up yourself through your Government Gateway account gives you more control over the account, software choice and submission process. You should also:

• Choose MTD-compatible accounting software.

• Make sure digital records have been maintained from the relevant start date.

• Submit any outstanding quarterly updates promptly.

• Keep a clear audit trail for income, expenses and adjustments.

• Remember that quarterly updates do not replace the annual Self-Assessment tax return.

There are no penalty points for late quarterly updates during 2026/27, which is the first year of MTD for Income Tax. However, digital record-keeping remains a legal requirement, and penalties can still apply to late Self-Assessment returns or late tax payments.

If you are unsure whether company and personal income should be considered together, speak to an accountant before relying on an assumption.

2. VAT on qualifying domestic electricity will fall to 0%

From 1 October 2026 until 31 March 2027, VAT on domestic and qualifying electricity supplies will fall from 5% to 0%.

The government’s announcement on the electricity VAT cut confirms that the measure is intended to reduce household energy costs. Some small businesses may benefit where their electricity supply qualifies for domestic or reduced-rate treatment.

The change does not apply to every business energy bill. Most commercial-standard electricity supplies remain subject to VAT at 20%. Gas and other fuels are also unchanged.

What this means for SMEs

For a VAT-registered business using a standard commercial electricity supply, the change is usually likely to be broadly cashflow-neutral. The business generally claims VAT on its energy costs as input tax, subject to the normal rules.

The position may be different for:

• Non-VAT-registered businesses.

• Businesses receiving qualifying domestic supplies.

• Charities and residential care businesses.

• Mixed-use premises.

• Businesses with partial exemption or restricted input tax recovery.

A business receiving electricity at the reduced rate may see a direct reduction in its cost. However, the exact treatment depends on the supply, the premises and how the energy is used.

Suppliers will need the correct declarations and customer information on file before applying the zero rate. Businesses should check their energy bills after 1 October and query any treatment that appears inconsistent with their supply arrangement.

Do not assume that every electricity bill will move from 5% to 0%. Commercial-standard supplies will generally remain at 20%.

3. HMRC is considering mandatory Direct Debits and earlier tax payments

HMRC and HM Treasury have consulted on requiring most VAT and PAYE return liabilities to be paid by Direct Debit. The consultation ran from 23 June to 16 August 2026 and is now closed.

The HMRC consultation on Direct Debit payments for VAT and PAYE proposed making Direct Debit the required payment method for most businesses, subject to exceptions.

The government’s objective is to reduce missed payments, incorrect references and the build-up of tax debt. However, ICAEW has raised concerns about the proposal in its August 2026 tax news.

ICAEW says mandatory Direct Debits could:

• Worsen the impact of errors on VAT and PAYE accounts.

• Interfere with internal payment approval systems.

• Create cashflow problems if HMRC collects an incorrect amount.

• Make it more difficult for smaller businesses to manage payment timing.

• Cause problems where liabilities are incorrectly allocated or overpayments are slow to recover.

There are also practical concerns around Direct Debit limits, dormant arrangements and the fact that agents cannot set up Direct Debits on behalf of taxpayers.

Earlier income tax payments

A separate consultation considers collecting some Self-Assessment liabilities through PAYE from April 2029, together with earlier and more frequent payments on account for other taxpayers.

ICAEW has warned that this could place additional burdens on employers and cause hardship for people with fluctuating income. For example, an employee with rental or freelance income may have a stable salary but unpredictable profits from other activities. Taking additional tax through payroll could reduce their available income before the final liability is known.

What this means for SMEs

There is no immediate requirement to change how your VAT or PAYE payments are made. No implementation date has been confirmed for mandatory Direct Debits.

However, growing businesses should consider the direction of travel. If tax is collected more automatically or earlier, there may be less flexibility over when cash leaves the business bank account.

Now is a good time to:

• Review VAT and PAYE payment dates against your cashflow forecast.

• Keep a separate reserve for payroll taxes and VAT.

• Check who has authority to approve tax payments.

• Reconcile HMRC accounts regularly.

• Make sure your payroll and bookkeeping records agree before submission.

• Consider whether a Direct Debit would work with your internal controls.

The Deloitte TaxScape business tax briefing also highlights the wider tax administration changes and the need for businesses to monitor upcoming policy developments.

4. Deep dive: corporation tax planning before the October Budget

The next Budget is scheduled for 28 October 2026. Until new measures are announced, limited companies should plan using the rules currently in force rather than assuming that a tax change is guaranteed.

A corporation tax review should cover four main areas.

Capital allowances and investment timing

Capital expenditure can significantly change the timing of your corporation tax liability.

Depending on the asset and the conditions, your company may be able to use:

• Full expensing for qualifying new plant and machinery.

• The £1 million Annual Investment Allowance.

• The 40% first-year allowance for some qualifying expenditure that does not qualify for full expensing.

• Writing-down allowances, including the reduced main rate of 14% for relevant expenditure from April 2026.

Before placing a large order, check:

1. Whether the asset qualifies.

2. Whether it is new or second-hand.

3. Whether it is used in the business.

4. Whether the expenditure falls in the intended accounting period.

5. Whether the claim will create a loss or move profits between corporation tax bands.

Bringing forward investment may accelerate tax relief, but this is not automatically the best answer. The company still needs sufficient cash to pay for the asset, and an accelerated claim may be less valuable if the business is already making losses.

Dividend planning

Dividends are paid from distributable profits and do not reduce the company’s corporation tax bill. They must also be properly documented through board minutes and dividend vouchers.

With dividend tax rates increasing for some taxpayers from April 2026, directors should review whether the traditional low-salary, high-dividend approach remains suitable.

Consider:

• The shareholder’s other income.

• Whether dividends will push the shareholder into a higher tax band.

• Whether dividends can be spread across tax years.

• The cash needed for corporation tax, VAT and payroll.

• Whether each shareholder is entitled to the proposed dividend.

A dividend should never be declared simply because there is cash in the bank. The company must have sufficient distributable reserves after considering its accounts and liabilities.

Director remuneration

Salary, bonuses and employer pension contributions may be deductible for corporation tax, provided they are incurred wholly and exclusively for the business and correctly recorded.

The most efficient balance depends on the company and the individual. A higher salary may reduce corporation tax but increase income tax, National Insurance or employer costs. A bonus may be deductible, but its timing and documentation need careful review. An employer pension contribution may support long-term planning while reducing taxable profits, subject to pension rules and affordability.

A corporation tax accountant can model different combinations of:

• Salary.

• Bonuses.

• Dividends.

• Pension contributions.

• Capital investment.

• Loss relief.

• Associated companies.

This is especially important where taxable profits fall between £50,000 and £250,000, because marginal relief can produce a higher effective rate than the small profits rate.

Reserving for the corporation tax bill

For most companies that are not classed as large, corporation tax is due nine months and one day after the end of the accounting period.

For example, a company with a 31 December year end will generally have a corporation tax payment deadline of 1 October in the following year.

Do not treat the full bank balance as available for dividends or expansion. Build a tax reserve using a realistic profit forecast, then update it monthly as sales, costs and investment change.

The current corporation tax rates published by HMRC show the 19% small profits rate, the 25% main rate and the marginal relief band. These figures should be checked again after the Budget.

Action list for the week

Growing SMEs should consider taking these steps before the end of August:

1. Check personal income alongside company income. Directors with rental or sole-trader income may need to review their MTD position.

2. Review the first MTD quarterly update. If it is outstanding, submit it promptly and retain submission evidence.

3. Check electricity VAT treatment. Identify whether each premises receives a commercial or qualifying domestic supply.

4. Update cashflow forecasts. Include VAT, PAYE and corporation tax payment dates.

5. Review payment controls. Make sure HMRC liabilities are reconciled before any automatic collection is considered.

6. Prepare for the Budget. List planned investments, director remuneration changes and dividend decisions.

7. Book a corporation tax planning review. An early model can show how investment and extraction decisions affect both company and personal tax.

If you are looking for accountants for small business, Accountant Search can match you with a suitable adviser. You can find an accountant here, or explore support specifically for a limited company accountant.

Self-Assessment tick-box

• Self-Assessment tick-box: Confirm whether your combined gross sole-trader and property income exceeded £50,000 in 2024/25, whether MTD for Income Tax applies, and whether you have submitted any outstanding quarterly updates.

SA registration form

If you need help checking your Self-Assessment or MTD position, complete the SA registration form through our Self-Assessment accountant service. We can help match you with an accountant who understands both personal tax and the needs of a growing limited company.

This article is for general information and is based on the position understood on 24 August 2026. Tax treatment depends on your circumstances, and proposed measures may change before legislation is introduced.