Dividend tax rises: why business owners need to act now

I work with many business owners who are trying to balance running their company with planning for their own financial future.

Dividend tax rises: what business owners need to know

The upcoming dividend tax changes are a reminder that what worked last year might not be the best approach going forward.

Taking time now to review how you pay yourself can help you make smart decisions that protect both your business and your personal finances.

The start of a new year is a great time to take stock. For small and medium-sized business owners, the way you take income can have a big impact on your tax bill and your long-term wealth.

With dividend tax rates set to rise from April 2026 and income tax thresholds still frozen, planning ahead is more important than ever.

What’s changing with dividend tax from April 2026?

In the Autumn Budget, the Chancellor announced that dividend tax rates will rise by 2% from April 2026:

• Basic rate: increasing from 8.75% to 10.75%
• Higher rate: increasing from 33.75% to 35.75%
• Additional rate: remains at 39.35%

For many SME owners who take most of their income as dividends, this is a big change.

Dividends are paid from profits that may have already been taxed at up to 25% Corporation Tax.

This extra increase adds more pressure at a time when costs are rising, and tax thresholds remain frozen.

Why dividend tax changes matter for SME owners

The overall tax burden for business owners is high. If you rely on dividends as your main source of income, these changes could reduce your take-home pay and affect your ability to save for the future.

Planning ahead gives you more flexibility to adapt before the new rates take effect.

Key areas business owners should review now

Salary vs dividends – finding the right balance

Reassess the balance between salary and dividends.

A modest salary can help maintain pension contributions and National Insurance credits, while dividends can remain tax-efficient up to certain thresholds.

Pension contributions as a tax-efficient strategy

Pensions remain one of the most effective ways to extract profits from your business tax-efficiently.

Employer contributions can reduce Corporation Tax and build long-term wealth.

Using allowances and tax wrappers effectively

Consider options such as:

• Using you and your spouse’s allowances: Pension, ISA, Capital Gains, etc
• Reviewing company benefits and expenses

Business protection planning for company directors

You should look at provisions including:

• Key Person insurance: protects the business if a key director or employee dies or becomes critically ill. Premiums are usually tax-deductible.
• Shareholder protection: ensures shares can be bought back if a shareholder dies, avoiding disruption and safeguarding control.
• Relevant life policies: A tax-efficient way for directors to provide life cover for themselves or employees, paid by the company and usually deductible for Corporation Tax.

Why working with expert advisers matters

Tax planning for business owners often needs a joined-up approach.

Working closely with both a tax adviser and a financial planner ensures you’re not only compliant but also making the most of every opportunity to reduce tax and grow wealth.

Accountants can help with the technical aspects of remuneration and compliance, while financial planners focus on the bigger picture: your lifestyle goals, retirement plans and family security.

Take action before dividend tax rates rise

The end of the 2025/26 tax year is only a few months away. Early planning means you can take advantage of current allowances and avoid last-minute decisions that may not be optimal.

I see first-hand how easy it is for business owners to put their own planning on the back burner.

Small and mid-sized businesses are the backbone of the UK economy, but the environment is becoming tougher for those taking the risk to grow and employ.

Reviewing your remuneration strategy now can help you stay ahead of upcoming changes and protect your financial future.

Dividend tax planning: next steps for business owners

If you’re a business owner unsure of where the new dividend taxation regime leaves you, now is the time to act.

Book a confidential consultation and we can help you review your remuneration strategy and ensure you’re extracting profits in the most tax-efficient way for both your business and personal finances.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is also not a reliable indicator of future performance. Always seek professional advice before making financial decisions.