If you run a limited company, dividend tax planning should be near the top of your to-do list each year. Paying yourself the right mix of salary and dividends can reduce your overall tax bill, smooth cashflow and keep you on the right side of HMRC. For 2025/26, the headline points are familiar but important: the 0% dividend allowance remains £500, the dividend tax rates stay at 8.75%, 33.75% and 39.35%, and new reporting requirements apply to many directors of close companies. In other words, small details matter – and a little planning goes a long way.
Before we get practical, a quick reminder of the context. The standard personal allowance is still £12,570 in 2025/26 (HMRC, 2025). Freezes to income tax thresholds and reductions to allowances mean more people are paying more tax than a few years ago, and the Office for Budget Responsibility (OBR) expects income tax to raise around £330.7bn in 2025/26 (OBR, 2025). That scale underlines why owners and directors benefit from early, structured dividend tax planning each year.
How dividends are taxed in 2025/26
Dividends are paid from post-tax company profits. For individuals, dividend income sits on top of other income and is taxed in bands.
- Dividend allowance: £500 at 0% for 2025/26.
- Rates above the allowance: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate). See HMRC – Tax on dividends.
The standard personal allowance of £12,570 still applies but reduces by £1 for every £2 of adjusted net income over £100,000.
Practical steps for dividend tax planning in 2025/26
Getting the building blocks right first often saves the most tax.
- Pay a sensible salary: Aim to secure state pension credits and use employer pension or other reliefs where suitable. Salary is deductible for corporation tax, dividends are not.
- Use allowances fully: Plan dividends so you use the £500 dividend allowance and any remaining personal allowance efficiently.
- Share income where legitimate: Spouse or civil partner shareholdings – where appropriate and commercially sound, consider holding shares between spouses so both personal and dividend allowances, and basic rate bands, are used.
- Consider pension contributions: Pension planning – personal contributions can reduce taxable income, keeping more dividends in lower bands.
- Time your distributions: Timing – bringing a dividend forward or deferring it to the next tax year can keep you under a threshold.
- Keep minutes and paperwork: Governance – record dividend declarations, check distributable reserves because dividends may only be lawfully paid from available profits.
- Watch benefits and traps: Threshold awareness – be mindful of the child benefit charge and the taper of the personal allowance over £100,000.
If you want a tailored plan, our business tax planning and personal tax services pages outline how we can help across the full year, not just at filing time.
New reporting for close company dividends from April 2025
From the 2025/26 self assessment return onwards, HMRC requires extra data from many director-shareholders in close companies. Returns must disclose information such as the company name and registration number, the highest percentage shareholding held in the year, and the dividend amount received from that company. These changes stem from HMRC’s “Improving the data HMRC collects from its customers” regulations and apply for returns for 2025/26 and later years (HMRC policy update, 2025). In short: better record-keeping is essential.
What to do now
- Maintain accurate ledgers: Record each dividend by company, date, minutes and amount.
- Capture ownership data: Keep evidence of shareholdings and any changes in the year.
- Align with payroll and Real Time Information (RTI): Keep salary and benefits records tidy so total income bands are clear at year end.
If you are unsure whether your company is “close”, or how to prepare, contact us.
Salary versus dividends – finding the right mix
There is no single best answer – the right mix depends on profits, other income, pension strategy, benefits and whether you plan to reinvest. Here are a few guiding points.
- Corporation tax interaction: Salary reduces taxable profits, dividends do not. The corporation tax framework means the marginal rate depends on your profit level, associated companies and marginal relief.
- National insurance: Salaries can trigger employee and employer national insurance contributions (NICs), whereas dividends do not attract NICs. Balancing NICs against corporation tax relief on salary is part of efficient planning.
- Pension contributions: Employer pension contributions can be very efficient for directors and can reduce income that would otherwise push dividends into higher bands.
- Cashflow: Dividends are flexible and can be timed. Salaries provide regularity for mortgages and affordability checks, which matters for some directors.
Why planning matters this year
Two data points highlight the stakes. First, the standard personal allowance remains £12,570 in 2025/26, with the higher-rate threshold still drawing many earners into higher bands. Second, as mentioned above, the OBR expects income tax receipts of about £330.7bn in 2025/26, reflecting how threshold freezes, higher interest income and steady dividend income feed the Exchequer. Directors who keep a close eye on thresholds and allowances are less likely to be surprised by unexpected tax.
Putting dividend tax planning into practice: A simple annual checklist
- Forecast profits: Build a 12-month view so you know how much distributable profit is available.
- Map your income bands: Annual review – include salary, rental income, benefits, investment income, and expected dividends.
- Phase dividends: Staggered payments – consider quarterly or half-year distributions to stay within targets.
- Minute everything: Company records – board minutes, vouchers and entries should be complete and consistent.
Ready to put a plan in place?
Good dividend tax planning blends compliance, timing and practical choices. It is not about aggressive schemes – it is about using the rules as they stand to support your goals, smooth cashflow and reduce risk. For 2025/26, three actions will help most directors: confirm your salary level, plan dividends around the £500 allowance and your tax bands, and tighten records to meet the new close-company reporting rules. Add pension planning and ISA use, and you have a straightforward, defensible plan that works year after year.
We have advised owner-managed businesses for generations, and we know what HMRC expects. If you would like a second pair of eyes on your plan, or want us to manage the whole process, we can help. Explore our business tax planning service, read more about personal tax services or get in touch to book a no-obligation chat. For a practical, year round take on dividend tax planning, speak to us today.