If you are an owner-managed business, you may know that, from the 6th of April 2026 the basic and higher rates of tax on dividend income will increase by 2%. This means owner-managers need to act as a matter of urgency if they wish to benefit from some fairly basic tax planning.
So, what will be the exact change? The basic and higher tax rates on dividend income are currently 8.75% and 33.75%, respectively. These rates are going up to 10.75% and 35.75%. The dividend additional tax rate is not changing.
How do rate rises affect current tax planning?
It makes sense to bring forward a dividend to 2025/26 if this will save the two percentage points in tax, even though it will mean tax is payable a year earlier.
An example of this is, if a higher rate taxpayer brings forward a dividend of £25,000, this will save £500 in tax, although the liability will be due 31 January 2027 rather than 31 January 2028.
How do rate rises impact future tax planning?
Although extracting profits with a mix of a low salary and high dividends has often been the most beneficial approach, the balance is shifting towards taking higher salary:
- Take, for example, Samantha, a higher rate taxpayer who is the sole director and shareholder of Sam Ltd. For the year ended 31 March 2027, SamLtd is expected to make profits of £150,000, of which Sam wants to extract £100,000.
- If Samantha takes a salary of £12,570 (to use her personal allowance) plus dividends of £87,430, the total personal tax, corporate tax and national insurance contributions (NICs) cost for her and Sam Ltd will be nearly £56,000.
- However, if Samantha takes the whole £100,000 as salary, the overall tax and NIC cost will be about £3,000 less.
It should be noted, however, that Samantha’s net tax income is nearly £10,000 less with the salary option, because of the way the tax cost is distributed between her and Sam Ltd. If the figures are adjusted so that she has roughly the same net income, there is then a modest tax advantage to taking a low salary and high dividends. However, there can be non-tax advantages to taking salary, such as making it easier to apply for a mortgage.
The best extraction strategy will vary from director to director depending on factors such as other income, whether the NIC employment allowance is available, pensions and company profits.
The government guidance on changes to the tax rates for property, savings and dividend income can be found here.
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