The 2025/26 tax year brought significant changes to VAT thresholds for the first time in several years. While the adjustments may seem small at first glance, they have already begun to influence pricing decisions, cash flow, and compliance responsibilities for small businesses across the UK. If your turnover is close to the VAT line, understanding these changes is essential to avoiding unexpected registration obligations and maintaining healthy profit margins.
This guide explains what the new thresholds mean, how they affect your business, and what every small business owner should be monitoring in 2025/26.
A Quick Recap of the 2025 VAT Threshold Changes
From April 2025, the VAT thresholds were increased by HMRC:
- The VAT registration threshold rose from £85,000 to £90,000.
- The VAT deregistration threshold increased from £83,000 to £88,000.
Although the changes are relatively modest, they offer potential breathing room for some businesses while creating new considerations for those planning to grow. Many business owners now have slightly more flexibility, but also more responsibility to monitor turnover accurately.
1. Rolling 12-Month Turnover Still Applies
One of the most common misunderstandings around VAT registration is how turnover is measured. VAT registration is not based on a company’s financial year. Instead, HMRC assesses turnover on a rolling 12-month basis.
This means every month, you must look back at the previous 12 months of sales to determine whether you have exceeded the £90,000 threshold.
For businesses experiencing growth, particularly seasonal or sudden growth, it is easy to pass the threshold without realising. Missing this can result in penalties and late registration interest charges.
Regular monitoring is essential. Setting up a monthly turnover review helps ensure you spot the moment when your sales approach the limit.
2. VAT Deregistration Is Not Always a Money Saver
If your turnover drops below the new £88,000 deregistration threshold, you may have the option to deregister voluntarily. However, deregistering is not automatically the most cost-effective choice.
Businesses serving mainly consumers, charities, or non-VAT-registered customers may benefit from deregistering because they can reduce their prices by no longer charging VAT. But for businesses with VAT-bearing expenses, remaining VAT-registered often improves cash flow. Reclaiming VAT on costs is especially valuable for service-based businesses or those with high overheads.
Before making a decision, it is worth running a full cost and margin analysis to see whether deregistering genuinely improves profitability.
3. Pricing and Competitiveness May Shift
Some small businesses reacted quickly to the threshold increase by deregistering in April 2025 and reducing their prices. For businesses that sell directly to the public, removing VAT can provide a pricing advantage.
However, deregistration means absorbing the VAT on your business expenses. If your costs include VAT that you can no longer reclaim, your profit margins may shrink. A price reduction may help win customers but worsen long-term sustainability.
A strategic pricing review is crucial to ensure that any changes linked to VAT are beneficial rather than damaging.
4. Re-Evaluating the VAT Flat Rate Scheme
The increase in thresholds has also affected businesses using the VAT Flat Rate Scheme. Businesses under the scheme can now remain eligible for longer before exceeding the new £90,000 limit.
However, the flat rate percentages, which determine how much VAT you keep, have not changed. For some businesses, especially those with higher VAT-bearing expenses, the flat rate scheme may now offer less financial benefit compared to standard VAT accounting.
It is worth reviewing your position to check whether the Flat Rate Scheme still provides the best outcome for your business in 2025/26.
5. Growth Planning for 2026 and Beyond
For many businesses, expansion plans are underway for 2026. If growth is a priority, approaching or exceeding the £90,000 threshold is likely. Planning ahead prevents VAT registration from becoming a surprise or a disruption.
Incorporating VAT into your cash flow forecasts ensures you fully understand how VAT registration will influence your income, pricing, and margins. Preparing early reduces the risk of reactive decisions that could harm profitability later.
Building VAT considerations into your business plan allows you to grow smoothly without compliance stress.
Key Takeaways for Small Businesses
The VAT threshold increases introduced in April 2025 may appear minor, but they have important implications for small businesses. Monitoring rolling turnover is more important than ever. Deregistration can benefit some businesses, but it can also reduce profitability if VAT-bearing costs are high. The increase in thresholds also provides an opportunity to reassess pricing strategies and revisit the suitability of the VAT Flat Rate Scheme. Above all, growth plans for 2026 should assume that VAT registration may occur sooner than expected.
Understanding how these changes affect your financial strategy is key to maintaining stability and supporting long-term growth. Contact us at Greystone Advisory if you would like further information.
