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July Questions and Answers

Newsletter issue – July 2026

Q: I can no longer claim tax relief on my expenses when working from home. Is there anything I can do (I'm a basic rate taxpayer)?

A: The Working From Home (WFH) tax relief scheme was introduced to allow employees who were contractually required to work from home to make a flat rate claim to help cover the extra household costs associated with working from home.

That was abolished from 6th April 2026 as HMRC stated there were high levels of non-compliance with over 50% of claims being ineligible. This is a loss of about £62 per year for basic rate taxpayers and £124 per year for higher rate taxpayers.

To try to fill this gap, you could ask your employer if they would pay you the WFH allowance directly. You'd need to have a formal homeworking agreement in place, otherwise the payments would be treated as a benefit-in-kind and be taxed accordingly.

Employers can reimburse evidenced additional household costs (e.g., utilities, business phone use) tax-free if necessary for the job. Mixed-use costs must be fairly apportioned They can also provide equipment (computers, furniture, etc.) tax-free if personal use is only incidental.

Q: Is there a way to mitigate the recent increase in dividend tax?

A: For this tax year, whilst the dividend allowance of £500 has remained frozen, the tax rate has increased 2 percentage points on each tax band (ordinary rate is 10.75%, upper rate is 35.75%). This has led many to review their investment strategies. The two main ones are:

  1. Stocks and Shares ISA - ideal for high-yield equity and UK equity income funds.
  2. Pension - ideal for long-term compounding of reinvested dividends, higher-rate taxpayers who want maximum tax efficiency, people expecting to be basic-rate taxpayers in retirement.

Both ISAs and pensions make dividends completely tax-free, but they do it in different ways and with very different consequences for access, tax relief, and long-term efficiency. ISAs win on flexibility; pensions win on raw tax power. If your goal is pure dividend efficiency, pensions are mathematically superior because you get tax relief on contributions, dividends grow tax-free and you may withdraw at a lower tax rate than you saved going in.

Other options to consider, particularly if you are a company director who pays part of your salary as dividends:

  1. Use spouse or partner allowances - transfer shares to your lower-earning spouse to use their allowances and lower tax band. Each partner has their own dividend allowance and personal allowance, doubling efficiency if structured well.
  2. Time dividends across tax years - spreading dividends across years helps avoid higher tax bands and makes full use of allowances.
  3. Consider capital gains instead of dividends - extracting value via share sales may qualify for CGT reliefs like Business Asset Disposal Relief. CGT rates can be lower than dividend tax.

Please get in touch with us to discuss your options.

Q: With unspent pensions being included in my estate for inheritance tax purposes from next year, how can I reduce my estate's value below £2m so that I don't lose the residence nil-rate band?

A: With the Inheritance Tax (IHT) threshold being frozen until 2031 and pensions being included in the IHT calculation from April 2027, more estates are finding themselves rising above £2m in value.

As you are no doubt aware, the standard nil-rate band is £325k and there is an additional nil-rate band of £175k if leaving a home to children or grandchildren. This means that couples can combine allowances to pass on up to £1m tax-free. However, for every £2 your estate is worth more than £2m, you lose £1 of this residence nil-rate band until it disappears. This means estates left by a single person worth £2.35m receive no residence nil-rate band, while for couples it's £2.7m

There are several ways to reduce your estate's value in a tax-efficient manner:

  1. Gifting - annual exemption of £3k per tax year, small gifts of £250 per person (unlimited recipients but cannot combine with other allowances for the same person), and wedding gifts of up to £5k for a child's marriage. Unlimited gifts become IHT-free if you survive 7 years (the "7-year rule").
  2. Charitable Gifting - gifts to charity reduce your taxable estate. Leaving 10% or more of your estate to charity reduces the IHT rate from 40% to 36%.
  3. Downsizing - moving to a cheaper home releases equity and reduces estate value. But you must give away or spend the released equity for it to reduce your estate (the 7-year rule may apply).
  4. Accessing pension wealth earlier - with pensions entering IHT from 2027, drawing down earlier may reduce your estate's value. But once taken, tax-free lump sums cannot be put back into the pension and you must ensure withdrawals don't jeopardise your retirement income.

Please get in touch to discuss these and other ways of reducing your IHT exposure.

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