Changes to dividend tax

If, like many small business directors, you pay yourself in part with dividends, this will affect your income. For a complete picture you will also need to consider your business cashflow, other income, pensions and savings. 

 

Many company directors pay themselves a low salary and receive part of their income as dividends. This is tax efficient because dividend tax is lower than income tax. However, April’s increase will narrow this gap. You may need to consider taking a higher salary to maintain your income, which will affect your business cashflow. 

 

Your company can pay dividends to shareholders, provided it has made a profit. You can’t count dividends as business costs, so you can’t offset them against your Corporation Tax. 

 

Importantly, your company can’t pay out more in dividends than its profits. If you pay an ‘illegal dividend’ you could become personally responsible for your company’s liabilities. 

 

Usually, you’ll make dividend payments after the end of your company’s financial year. However, directors can decide to pay interim dividends at any time. You must ‘declare’ dividends in a directors’ meeting and keep minutes, even if you’re the only director. When you pay a dividend, you must also provide a voucher and keep a copy for your company’s records. 

 

There are non-cash items which can affect your profit, such as depreciation of capital assets. Before you can pay a dividend, your profit and loss account must show that there is enough profit available after tax, normally called a 'carried forward’ or ‘distributable' amount. 

 

So, for the same income you will pay £390 more tax in the 2026/27 tax year. 

 

For this year you may want to consider paying yourself extra dividends before April, if company profits and cashflow allow. If your business has more than one director, you may also want to review the impact of the Employment Allowance. Potentially, this could save up to £10,500 annually in National Insurance Contributions.