CGT vs Income Tax: The Key Differences in 2025/26
If your tax bill feels heavier than it should this year, you’re in good company. Capital Gains Tax and Income Tax are two completely separate systems, and getting them mixed up is one of the easiest ways UK taxpayers end up paying more than they need to.
So let’s clear it up. This guide walks you through the differences in plain English, using the confirmed 2026/27 figures, so you can plan properly and stop worrying that you’ve missed something obvious.
Key Takeaways
- Simplified expenses are HMRC-approved flat rates you can use instead of working out your actual business costs.
- They cover three areas: vehicles, working from home, and living on business premises.
- They’re available to sole traders and most partnerships, but not limited companies.
- They’re optional. You can choose whichever method gives the most tax-efficient result.
- You still need to keep basic records (mileage logs, hours worked from home, etc.).
What Actually Separates CGT from Income Tax?
Income Tax is about what you earn, your salary, self-employment profits, pension income, rental income and most savings interest.
Capital Gains Tax (CGT) is about what your assets have grown by when you sell or dispose of them, things like shares, a second home, business interests or cryptocurrency.
Put simply: Income Tax catches the money coming in. CGT catches the profit when an asset goes out. They use different rates, different allowances and different deadlines, which is exactly why so many people get tripped up.
The 5 Differences You Really Need to Understand
1. The Rates Are Genuinely Different
CGT tops out at 24%. Income Tax tops out at 45% (closer to 47% once you add employee National Insurance). So for higher and additional-rate taxpayers, capital disposals are still taxed more lightly than the same amount of earned income, but the gap has narrowed a lot since 2024.
2. The Allowances Are in Different Universes
- CGT annual exempt amount: £3,000
- Income Tax Personal Allowance: £12,570
The CGT allowance has been cut by around 75% since 2022/23, when it was £12,300. If you hold investments outside an ISA, this is probably the single biggest planning shift you’ve felt in the last few years.
3. CGT Lets You Pick Your Timing
You usually choose when to sell an asset, and that opens up real planning options:
- Spread disposals across two or more tax years to use multiple AEAs
- Sell in years when your income is lower
- Pair gains with any losses you have
Income Tax is mostly stuck to when income arises. There’s far less room to be clever with it.
4. Losses Work Differently
Capital losses can be:
- Used against gains in the same tax year, and
- Carried forward indefinitely against future gains, provided you report them to HMRC within four years
Income Tax losses are more restrictive. Trading losses have their own rules, and most employment-related losses can’t be offset against unrelated income.
5. The Deadlines Aren’t the Same
Item | Deadline |
UK residential property gains | Report and pay within 60 days of completion through HMRC’s “Capital Gains Tax on UK property” account |
Other capital gains | Report through Self Assessment by 31 January following the tax year |
Employment income | Handled automatically through PAYE |
Self-employment and dividends | Self Assessment by 31 January |
Missing the 60-day property reporting deadline triggers an automatic penalty, and it happens more often than it should.
Capital Gains Tax in 2026/27: The Numbers That Matter
The Headline Rates
For any disposal made on or after 6 April 2026, the main CGT rates for individuals look like this:
Your tax position | CGT rate (applies to all assets, including residential property) |
Basic-rate band | 18% |
Higher or additional-rate band | 24% |
Trustees and personal representatives | 24% |
These rates now apply across the board, shares, funds, crypto, second homes and buy-to-let property, after the alignment confirmed in the October 2024 Budget.
Your Annual Exempt Amount
The CGT annual exempt amount (AEA) sits at £3,000 for 2026/27, the same as last year. Each person gets their own, so a married couple or civil partners can shelter up to £6,000 of gains a year between them, as long as the assets are owned in the right names before the sale.
One thing to remember: the AEA is a use-it-or-lose-it allowance. If you don’t use it in the tax year, it’s gone.
When Does CGT Actually Apply?
CGT usually comes into play when you dispose of:
- Shares or funds held outside an ISA or pension
- A second home, buy-to-let, or other investment property
- Business assets or shares in your own limited company
- Personal possessions worth more than £6,000 (cars are excluded)
- Cryptoassets held as personal investments
Your main home is normally covered by Private Residence Relief, though things like letting it out, long periods of absence, or using part of it for business can complicate that.
What Changed on 6 April 2026?
Two updates worth flagging:
- Business Asset Disposal Relief (BADR) rose from 14% to 18% on the first £1 million of qualifying lifetime gains.
- Carried interest (the performance fee fund managers receive) has moved out of CGT entirely and is now taxed as income, with National Insurance applied too.
Aside from that, the main 18%/24% rates and the £3,000 AEA are unchanged from 2025/26.
Income Tax in 2026/27: A Quick Refresher
The Bands (England, Wales and Northern Ireland)
The thresholds are frozen again and look identical to 2025/26:
Band | Taxable income | Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic rate | £12,571 – £50,270 | 20% |
Higher rate | £50,271 – £125,140 | 40% |
Additional rate | Above £125,140 | 45% |
The Personal Allowance and basic-rate threshold are now legislated to stay frozen until April 2031. In real terms, that means more people drift into higher tax bands every year as wages creep up, the effect commentators call “fiscal drag.”
The £100,000 Trap
Earn over £100,000 and your Personal Allowance starts shrinking, by £1 for every £2 you go above the threshold, until it vanishes completely at £125,140. The end result is an effective marginal tax rate of 60% on income between £100,000 and £125,140. If you’re anywhere near that line, pension contributions or charitable giving usually become well worth a serious look.
Scotland
Scottish taxpayers pay Scottish Income Tax on non-savings, non-dividend income, but dividend, savings and CGT rates are still set UK-wide.
What Counts as Taxable Income?
The usual suspects:
- Salary, bonuses and benefits in kind
- Self-employment profits
- Pension income, both state and private
- Rental income
- Most savings interest above the Personal Savings Allowance
- Dividends above the £500 dividend allowance
Dividend Tax: The Big 2026/27 Change
This is the one that’s caught a lot of company directors off guard. From 6 April 2026, dividend tax rates rose by 2 percentage points for basic and higher-rate taxpayers (announced in the Autumn 2025 Budget). The £500 dividend allowance hasn’t moved.
Band | 2025/26 | 2026/27 |
Basic rate | 8.75% | 10.75% |
Higher rate | 33.75% | 35.75% |
Additional rate | 39.35% | 39.35% |
For limited company owners taking most of their income as dividends, that extra 2% adds up surprisingly quickly across a full year.
Three Quick Examples From our Clients
Example 1: Asha, Basic-Rate Taxpayer Selling Shares
Asha has £20,000 of taxable income after her Personal Allowance. In 2026/27 she sells some shares and makes a £12,600 gain.
- Less the £3,000 AEA → taxable gain of £9,600
- Added to taxable income: £20,000 + £9,600 = £29,600
- That’s below £37,700 (the top of the basic-rate band), so the whole gain is taxed at 18%
- CGT due: £1,728
Example 2: David, Selling a Buy-to-Let
David has £20,000 of taxable income and makes a £52,600 gain on a rental property.
- Less the £3,000 AEA → taxable gain of £49,600
- Added to income: £20,000 + £49,600 = £69,600
- £17,700 of the gain falls in the basic-rate band → £17,700 × 18% = £3,186
- £31,900 spills into the higher-rate band → £31,900 × 24% = £7,656
- Total CGT: £10,842, which has to be reported and paid within 60 days of completion.
Example 3: Maya, Company Director on Salary Plus Dividends
Maya pays herself a £12,570 salary and £40,000 in dividends from her own limited company.
- Salary uses her Personal Allowance, so no Income Tax there
- First £500 of dividends covered by the dividend allowance
- The remaining £39,500 sits in the basic-rate band → 10.75% = £4,246
Under the old 8.75% rate, the same income would have produced a dividend tax bill of roughly £3,456. That’s around £790 more tax for doing nothing differently, which is exactly why a quick review of salary-versus-dividend splits is worthwhile this year.
Common Mistakes That End Up Costing Real Money
- Treating dividends as capital gains. They’re not. Dividends sit under Income Tax with their own rate scale.
- Forgetting the 60-day property rule. Plenty of sellers still assume they can sort everything out at Self Assessment.
- Not transferring assets to a spouse or civil partner before sale. Transfers between spouses happen on a “no gain, no loss” basis, which is one of the simplest legitimate ways to double up the AEA.
- Ignoring loss harvesting. Even when you have no gains to offset, reporting losses preserves them for future years.
- Sliding into the £100,000 trap. If you’re hovering just above it, salary sacrifice or pension contributions can pull you back under and reclaim your Personal Allowance.
- Selling everything in one tax year. Splitting a sale either side of 5 April can give you two £3,000 AEAs instead of one.
Sensible Planning Steps for 2026/27
- Use ISAs and pensions first. Gains and dividends inside these wrappers are completely free from CGT and dividend tax.
- Consider “Bed and ISA” or “Bed and SIPP.” Sell holdings outside a wrapper (using your AEA) and buy them back inside one to reset your cost base.
- Use both spouses’ allowances. Transfer assets before the sale, not after.
- Spread disposals across tax years. Selling part of a holding before 5 April and the rest after can effectively double your AEA.
- Time disposals around your income. A career break, parental leave or transition into retirement can be a tax-efficient window.
- Look at pension contributions. They can extend your basic-rate band, which means a chunk of your gain may be taxed at 18% rather than 24%.
- Claim BADR if you qualify. Even at 18%, it’s still well below the 24% higher rate, on up to £1 million of qualifying business gains.
What Might Come Next?
The CGT and Income Tax landscape has shifted noticeably over the last two Budgets, and the direction of travel is worth watching. Topics that keep appearing in policy discussions include:
- Possible further alignment of CGT and Income Tax rates
- More changes to how dividends are taxed
- Making Tax Digital widening to cover more types of taxpayer
The best defence is the simple one: keep an eye on Budget announcements and give your tax position a proper review at least once a year.
FAQ
Can CGT and Income Tax both apply to the same transaction?
Usually they apply to different parts of a transaction, but some business sales can produce both income and capital elements. If a deal looks complex, it's worth getting specialist advice before you commit.
Do I pay National Insurance on capital gains?
No. CGT sits entirely outside National Insurance, which is one reason a capital disposal can be more tax-efficient than the same amount taken as salary.
How do I report a capital gain to HMRC?
For UK residential property, use HMRC's "Capital Gains Tax on UK property" account within 60 days of completion. For other assets, report through your Self Assessment return by 31 January after the end of the tax year.
Are gains inside an ISA taxable?
No. Gains and dividends inside an ISA or pension are free from UK CGT and dividend tax.
Has the CGT rate on residential property changed for 2026/27?
No. The 18% and 24% rates remain in place. Residential property has been taxed at these rates since the alignment in October 2024.
Is Business Asset Disposal Relief still worth claiming in 2026/27?
Yes. Even at the new 18% rate, BADR is still well below the 24% higher rate of CGT, on up to £1 million of qualifying lifetime gains.