CGT changes 2026 — what they mean for contractor take-home pay
Direct Answer
Proposals to align Capital Gains Tax with income tax rates would hit limited company contractors hard at exit — particularly those using Business Asset Disposal Relief (BADR) when winding up or selling their company. Under current rules, BADR charges CGT at 14% (rising to 18% from April 2026) on qualifying gains up to £1m. Under full alignment, the same gain could be taxed at 40% for a higher-rate taxpayer. No legislation has been confirmed — but contractors planning a disposal within the next 12–24 months need to model both scenarios now, not after a Budget announcement.
Current CGT rates — what contractors are working with
As of 2025/26, the CGT rates that matter most to limited company contractors are:
- Shares and business assets (standard): 10% basic rate, 20% higher rate
- Business Asset Disposal Relief (BADR): 14% on qualifying gains up to £1,000,000 lifetime (rising to 18% from April 2026)
- Residential property: 18% basic rate, 24% higher rate (separate rules, less relevant for pure contractors)
- Annual exempt amount: £3,000 (2025/26)
For a one-man PSC contractor who closes or sells their limited company, BADR is typically the most important number. It means that accumulated company reserves extracted via a Members' Voluntary Liquidation (MVL) are taxed at 14% rather than up to 20% — and at a fraction of what income tax would charge on the same amount extracted as salary or dividends.
This is also directly relevant to the contractor take-home pay calculations that show the full annual benefit of the limited company structure.
The Streeting proposal — what it would change
Wes Streeting's proposal — described by tax commentators as an "idealist dream" — is to align CGT rates with income tax rates. That means:
- Basic rate: 20% (up from 10%)
- Higher rate: 40% (up from 20%)
- Additional rate: 45% (up from 20%)
Under this model, BADR would either be abolished or rendered largely irrelevant — its current value lies in the gap between the BADR rate and the standard CGT rate. If CGT aligns with income tax, that gap closes to zero.
HMRC's own internal modelling reportedly shows that this approach would generate a £7bn revenue loss rather than a gain, due to behavioural response: investors and business owners would simply hold assets longer, defer disposals, or restructure to avoid the trigger point. This is consistent with what happened after the 2016 and 2019 Entrepreneurs' Relief changes — each increase in effective rate was followed by a rush of pre-Budget disposals, then a sharp drop in CGT receipts.
As of May 2026, no legislation has been confirmed. Planning for scenarios without triggering unnecessary restructuring is the right posture.
Worked example — CGT on wind-up of a contractor limited company
This example uses a contractor who has operated their PSC for eight years and is now planning to close it via a Members' Voluntary Liquidation (MVL). The company has £200,000 of distributable reserves. The contractor has always owned 100% of the shares and has been the sole director throughout — BADR qualifying criteria are met.
| Scenario | CGT Rate | Gain (after £3,000 exempt) | Tax Bill | Net Proceeds |
|---|---|---|---|---|
| Current rules — BADR at 14% | 14% | £197,000 | £27,580 | £172,420 |
| BADR rising to 18% (from April 2026) | 18% | £197,000 | £35,460 | £161,540 |
| Full CGT alignment — higher rate (40%) | 40% | £197,000 | £78,800 | £118,200 |
| Full CGT alignment — basic rate (20%) | 20% | £197,000 | £39,400 | £157,600 |
The difference between BADR at 14% and full higher-rate alignment at 40% is £51,220 on this example. For a contractor with £300,000 in reserves at wind-up, the same comparison produces a gap of over £78,000.
These are approximations. The actual CGT calculation depends on the original cost of shares, any allowable losses, and whether income in the year of disposal pushes the gain into higher-rate territory. An accountant should run the precise numbers for your position.
Note also: the figures above assume the entire £200,000 is a capital gain on disposal. In a real MVL, the calculation involves the cost of the shares (usually negligible for a PSC), any previously extracted dividends, and the liquidator's fees. The broad comparison holds.
How CGT changes would affect the salary/dividend calculation
For day-to-day contracting, CGT changes do not affect your annual take-home pay. The optimal salary and dividend split remains the same regardless of what happens to CGT on disposal.
What changes is the exit calculation. The current strategy for many contractors is to accumulate reserves in the company during high-earning years, then extract them via MVL at BADR rates on wind-up. If CGT aligns with income tax, that exit strategy loses most of its tax advantage. At 40%, the benefit of accumulating reserves in the company (rather than extracting them as dividends each year) diminishes significantly — because the deferred tax on disposal would be similar to what you would have paid on dividends annually.
This changes the planning calculus in two ways:
- Extraction timing: Contractors who are sitting on large reserves should model whether it makes more sense to take higher dividends now (at 33.75% higher rate dividend tax) rather than hold reserves for a potentially higher-taxed exit.
- Company wind-up timing: Contractors who are already planning to close within 12–24 months should take advice now. A disposal under current BADR rules at 14% — before any legislation change — may be significantly more efficient than waiting.
The salary and dividend planning guide has the baseline figures for annual extraction decisions.
What contractors should do now
No confirmed legislation means the wrong move is triggering an irreversible transaction based on a proposal that may not pass — or may be significantly watered down. The right move is to model your position now so you can act quickly if needed.
Specifically:
- If you have substantial reserves and are planning to close your company within two years, get a tax modelling review now. Understand your liability under current BADR rules vs aligned rates, and identify your decision point.
- If you are in the early years of contracting, the annual take-home pay advantage of the limited company structure (roughly £11,808/year at £400/day vs inside IR35 treatment) is not affected by CGT changes. The company route still makes clear sense for ongoing work.
- Do not restructure speculatively. Creating a new holding company, moving assets, or changing your share structure in anticipation of a proposal that has not been legislated creates costs and complexity without any guaranteed benefit.
- Review annually. If legislation is confirmed — even in a Budget "red box" — you will typically have weeks, not months, to respond. Having modelled your position in advance means you can act in that window.
The Autobooks Platinum plan at £129+VAT/month includes an annual tax planning review specifically covering scenarios like this. If you are on Gold (£89+VAT/month), raising this in your next review conversation costs nothing extra.
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