With the new tax year now underway, dividend taxation has changed again. While the adjustments may appear modest, their impact on business owners could be significant. If you take dividends from a limited company, now is the time to review your strategy.
From 6 April 2026, dividend tax rates have increased by 2%:
Basic rate: now 10.75% (previously 8.75%)
Higher rate: now 35.75% (previously 33.75%)
Additional rate: remains at 39.35%
At the same time, the dividend allowance remains at just £500, meaning only a very small portion of dividend income is tax free.
Why This Matters
For many owner managed businesses, dividends have traditionally been a tax-efficient way to extract profits. However, with increasing rates and a significantly reduced allowance, dividends are no longer the default option they once were.
Without proactive planning, these changes can lead to:
- Reduced net income
- Higher overall tax liabilities
- Missed opportunities for tax efficiency
Planning Opportunities:
For many owner managed businesses, dividends are a core part of remuneration. However, these changes directly reduce net income unless proactive planning is in place.
Despite tighter rules, there are still effective strategies available, including:
Reviewing salary vs dividend balance:
A more balanced remuneration strategy may now be beneficial depending on your circumstances.
Timing of dividend payments
Careful timing across tax years can help manage thresholds and tax exposure.
Utilising shareholding structures
Income splitting between spouses or family members (where appropriate and compliant) may improve overall tax efficiency.
Considering pension contributions or reinvestment strategies
In some cases, retaining profits or redirecting funds can be more tax-efficient than extraction.
Finally:
What makes these changes particularly important is that they’re easy to overlook but could have a great impact at the end of the year.
Dividend tax is no longer the efficient default it once was for extracting profits. With higher rates and a reduced allowance, a more considered and proactive approach is essential.
If you haven’t reviewed your dividend strategy in the last 12 months, now is the time.
We’re here to help, get in touch if you’d like to discuss your options.
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