Dividend Planning 2025/26: What’s Changed and What Still Works

Published by RJP LLP – Chartered Certified Accountants and Tax Advisers

The landscape for dividend taxation has changed significantly in recent years — and 2025/26 is no exception. With the dividend allowance now at its lowest ever level and income tax thresholds frozen, company directors and shareholders need to plan smarter than ever to manage personal tax liabilities.

At RJP LLP, we specialise in advising owner-managed businesses on tax-efficient profit extraction. In this article, we explain what’s changed for dividends in 2025/26 — and what planning opportunities are still available.

1. Dividend Allowance Cut to Just £500

From 6 April 2024, the annual tax free dividend allowance fell from £1,000 to just £500 — meaning only a very small portion of dividend income is now tax-free.

Tax Band 2025/26 Dividend Tax Rate

Basic rate taxpayers 8.75%
Higher rate taxpayers 33.75%
Additional rate (45%) 39.35%

This means most shareholders will start paying tax on dividends at higher rates, especially those drawing income in excess of the higher-rate threshold (£50,270).

What Still Works in Dividend Planning?

Despite the allowance cuts, dividends remain a valuable and flexible way to extract profits from limited companies — particularly when combined with other planning techniques. Here’s what still works in 2025/26:

Salary + Dividend Strategy

Most SME company shareholders still benefit from a low salary (usually at or below the NIC threshold) combined with dividends.

This can:

• Minimise overall tax and NICs
• Maximise use of the personal allowance (£12,570) and basic rate band

RJP Tip: The most tax-efficient salary for 2025/26 is likely between £9,100 and £12,570, depending on your NI and state pension record preferences.

Use of Spousal or Civil Partner Allowances

If your spouse or civil partner has unused tax bands, consider transferring shares to them (subject to legal and commercial considerations). This can:

• Double your use of the dividend allowance
• Utilise their basic rate band (up to £50,270)
• Reduce overall family tax exposure

Be careful of settlements legislation — our team can advise on when this applies and how to structure transfers correctly.

Timing Matters

If you expect to cross into the higher- or additional-rate tax threshold, consider:

• Deferring dividend payments to a new tax year
• Bringing forward payments if you expect a fall in income

This kind of year-end tax planning can have a significant impact on marginal tax rates — especially with thresholds frozen until at least 2028.

Dividends via Alphabet Shares

If your company has multiple shareholders with differing income needs, alphabet shares (e.g. A, B, C shares) can offer flexibility to:

• Pay dividends to one shareholder but not another
• Customise amounts without breaching shareholding rights

Our team can help you review your company’s share structure and advise whether this kind of flexibility is possible.

Pension Contributions as a Complement

If you’re already close to the higher-rate threshold, company pension contributions are a tax-deductible way to extract profits while reducing tax rates.

Up to £60,000 (or more using carry forward) can be contributed annually, depending on your earnings and adjusted income levels.

Common Pitfalls to Avoid

• Overdrawing from reserves: Paying dividends that aren’t covered by retained profits is unlawful and could be challenged.
• No supporting paperwork: Dividends must be properly declared, with minutes and dividend vouchers — HMRC checks are increasing.
• Forgetting about Section 455: Director’s loans can trigger a 33.75% tax charge if not repaid on time.

How RJP LLP Can Help

At RJP LLP, our tax specialists work closely with shareholders to:

• Design efficient dividend strategies
• Advise on profit extraction methods (salary, dividends, pensions)
• Ensure compliance with company law and HMRC rules
• Prepare dividend vouchers, board minutes, and director loan account tracking

Smart dividend planning could save thousands in personal tax each year. Let us help you get it right.

RJP LLP are Chartered Certified Accountants and Tax Advisers working with owner-managed businesses and company directors across London and the South East.