Dividend tax planning for small business owners in 2025/26

Running your own limited company comes with many advantages but understanding the tax implications of how you pay yourself can be tricky.

Let’s make sure you don’t miss out on these potential savings.

Understanding dividend tax in 2025/26

If you’re a company director, you’ve likely noticed that the dividend allowance has taken a significant hit in recent years. The tax-free dividend allowance has plummeted from £2,000 in 2022/23 to just £500 in 2024/25, a reduction that continues to affect company directors in the 2025/26 tax year.

This means you’ll pay tax on more of your dividend income than before, making strategic planning even more crucial. The current dividend tax rates remain at:

• Basic rate taxpayers: 8.75%
• Higher rate taxpayers: 33.75%
• Additional rate taxpayers: 39.35%

The salary vs dividends balancing act

One of the most tax-efficient ways to pay yourself as a director is through a combination of salary and dividends. Finding the right balance is key to minimising your overall tax burden.

Salary considerations

Taking a salary provides several benefits:

• It counts as qualifying earnings for state pension purposes
• It’s a tax-deductible expense for your company, reducing corporation tax
• You can make pension contributions based on this income

However, salaries are subject to Income Tax and both employee’s and employer’s National Insurance contributions, which can add up quickly.

Many of our clients in Kent find that taking a salary up to the National Insurance threshold makes good sense. This allows you to maintain your state pension record without triggering National Insurance payments, while the rest of your remuneration can come through dividends.

Dividend advantages

Dividends offer significant tax advantages compared to salary:

• No National Insurance contributions are payable on dividends
• Dividend tax rates are lower than income tax rates
• The first £500 of dividends remains tax-free

A cafe owner in Sevenoaks who we advised last quarter was able to save nearly £4,200 in tax by restructuring her remuneration package to optimise the salary/dividend split.

Looking for personalised advice on the most tax-efficient way to pay yourself? Contact Adams Accountancy today for a review of your current arrangements. We can look at your specific situation and advise the best combination of salary and dividends for optimal tax planning.

Timing your dividend payments strategically

When you take dividends can be just as important as how much you take. Strategic timing of dividend payments can help spread your income across tax years and potentially keep you in lower tax brackets.

Many company directors find it beneficial to spread dividend payments throughout the year, particularly with payments in April and March. This approach helps distribute income across two tax years and allows you to make the most of your annual dividend allowance twice.

Remember that dividends can only be paid from available profits. Taking dividends when your company hasn’t made sufficient profits could be classified as an illegal dividend, creating tax complications and potential legal issues.

Using your spouse’s allowance

If your spouse or civil partner is also a shareholder in your company, you might be able to distribute dividends between you to make use of both of your tax allowances and potentially keep more income in the basic rate band.

A construction company director in Dartford saved over £7,000 in tax by ensuring both he and his wife received dividends from their family business, effectively doubling their tax-free allowance and making use of both of their basic rate bands.

Consider your pension contributions

Pension contributions can play a significant role in your overall tax planning strategy. Company contributions into your pension:

• Reduce your company’s corporation tax bill
• Aren’t subject to National Insurance
• Allow your retirement savings to grow in a tax-efficient environment

Many of our clients find that a combination of salary, dividends, and pension contributions provides the most tax-efficient approach to extracting profits from their company.

Plan ahead for the full tax year

Rather than making ad-hoc decisions about dividends, develop a comprehensive plan for the 2025/26 tax year to optimise your tax position. This should include forecasting both your company’s profits and your personal income needs.

Taking time at the start of the tax year to plan your dividend strategy helps ensure you don’t miss opportunities for tax savings and allows you to align your personal drawings with your business cashflow needs.

Reporting dividend payments

As with all income, you’ll need to include your dividend payments on your self-assessment tax return. If your dividends are under the allowance, there is no need to include them on your return. If you do not usually complete a tax return, you can ask HMRC to tax you via your PAYE code. Call 0300 200 3300 or contact the helpline online to report your dividends.

Get expert advice on your dividend strategy

Dividend tax planning is rarely one-size-fits-all. Your optimal strategy depends on your company’s profitability, your personal circumstances, and your long-term financial goals.

At Adams Accountancy, we help business owners across Kent to handle these complex decisions. Our friendly, approachable team can explain the options in plain English – never be afraid to ask whatever is on your mind to do with your business finances.

Book your free 15-minute consultation with Adams Accountancy today to ensure you’re not paying more tax than necessary on your company dividends. A short conversation could save you thousands in unnecessary tax.

Frequently Asked Questions about Dividends

Can I take dividends instead of salary to avoid National Insurance?

While dividends aren’t subject to National Insurance contributions, you can’t replace your entire salary with dividends. A small salary is essential for pension qualification purposes, and dividends can only be legitimately paid from available profits. HMRC may challenge arrangements that appear designed solely to avoid National Insurance.

What records do I need to keep for dividend payments?

You must prepare and maintain dividend vouchers for each payment, recording the date, company details, shareholder information, and dividend amount. Board meeting minutes approving the dividend payment should also be kept, along with evidence that the company had sufficient distributable profits to make the payment.

Can I pay dividends if my company isn’t profitable?

No, dividends can only be paid from accumulated profits available in your company. Paying dividends when your company doesn’t have sufficient profits is classified as an illegal dividend, which could lead to directors being personally liable for the payment and potential tax complications.

Can I use dividends to pay into my pension?

You cannot directly pay dividends into a pension scheme. However, you can receive dividends personally and then make contributions from your personal funds into a personal pension, though these contributions will be subject to the annual allowance limitations.

How do dividend payments affect my personal tax code?

If you regularly receive dividends, HMRC may adjust your tax code to collect any higher or additional rate tax due throughout the year. This is based on your previous tax returns and any information you’ve provided about expected dividend income for the current year.

Are dividends from my company treated differently than dividends from investments?

No, all dividends are treated the same way for tax purposes regardless of whether they come from your own company or from investments. The same tax-free allowance and tax rates apply to all dividend income combined on your tax return.

How do dividend payments affect eligibility for mortgage applications?

Lenders typically view dividend income less favourably than salary when assessing mortgage applications, often requiring 2-3 years of dividend history. Some lenders may only consider a percentage of dividend income or average it over several years when calculating affordability.

What’s the difference between interim and final dividends?

Interim dividends can be declared by directors at any point during the financial year, while final dividends are typically recommended by directors and approved by shareholders at the Annual General Meeting after year-end accounts are prepared. Both types must still only be paid from available profits.

How frequently can I pay myself dividends?

There are no legal restrictions on how often you can pay dividends – it could be monthly, quarterly, or annually. The key requirement is that your company must have sufficient distributable profits at the time each dividend is declared and paid.