Jun 4
From 6 April 2026, dividend tax increased by 2 percentage points at the basic and higher rate bands. The basic dividend rate is now 10.75%, up from 8.75%. The higher dividend rate is now 35.75%, up from 33.75%. The additional dividend rate remains unchanged at 39.35%.
Business Asset Disposal Relief, or BADR, also rose to 18% for qualifying disposals made on or after 6 April 2026. For owner-managers who have used the same low-salary, dividend-led extraction strategy for several years, these changes are a useful prompt to review the numbers properly.
The classic low-salary, high-dividend approach still works for many directors. It just works less well than it did, especially once pensions, director loan accounts and long-term exit planning are brought into the calculation.
This article is for owner-managers and directors of UK close companies, particularly those across Northern Ireland and Ireland. It covers the new rates, the cost of extraction, where the better alternatives now sit, and how BADR fits into the longer-term exit versus extraction decision.
The dividend tax changes were announced at Autumn Budget 2025 and apply from the 2026/27 tax year.
| Tax band | Dividend rate 2025/26 | Dividend rate 2026/27 | Change |
|---|---|---|---|
| Within personal allowance | 0% | 0% | No change |
| Within dividend allowance | 0% | 0% | No change |
| Basic rate | 8.75% | 10.75% | +2% |
| Higher rate | 33.75% | 35.75% | +2% |
| Additional rate | 39.35% | 39.35% | No change |
The dividend allowance remains £500. Dividends are still treated as the top slice of income. This means your salary and other income are counted first, and dividends are then taxed according to the band they fall into.
If your salary or other income already takes you into the higher rate band, your dividends are likely to be taxed at 35.75%, even if the dividend itself looks modest.
The Section 455 charge on overdrawn director loan accounts also rose to 35.75% for loans made or benefits conferred on or after 6 April 2026, because the charge is linked to the dividend upper rate. The interaction between dividend planning and loan account management is now tighter than ever. Our dedicated piece on director loans after April 2026 covers that position in full.
Many owner-managed companies have traditionally used a small salary combined with dividends. A salary around the personal allowance can preserve PAYE structure and National Insurance records, while dividends avoid employee and employer National Insurance.
That broad approach still has a place, but the 2026/27 National Insurance position needs to be reviewed carefully.
For 2026/27, the employee primary threshold is £12,570, but the employer secondary threshold is £5,000. Employer Class 1 National Insurance is 15% above the secondary threshold.
A salary of £12,570 therefore creates no employee NIC and no income tax, but it does create employer NIC of about £1,135.50 before Employment Allowance. If the company is eligible for Employment Allowance, that cost may be covered within the £10,500 allowance. If the company is a sole-director company where the only employee paid above the secondary threshold is that director, Employment Allowance will usually not be available.
This means the best salary level is not automatic. For some companies, the personal allowance salary still works. For others, a lower salary may be more efficient. Our piece on how tax accountants help small businesses covers why this should be reviewed annually, and our piece on how management accounts help SME owners explains the financial visibility needed to make that review properly.
A director taking £12,570 salary and £40,000 in dividends, with no other income, now pays about £790 more dividend tax than in 2025/26. On a £60,000 total draw made up of £12,570 salary and £47,430 dividends, the extra dividend tax is about £940. The increase is manageable, but it is no longer trivial.
For higher-earning owner-managers, the April 2026 changes strengthen the case for using employer pension contributions.
If a company has £10,000 of pre-tax profit and pays it out as a dividend, it may first pay corporation tax. At the 25% corporation tax rate, that leaves £7,500 available as a dividend. If the shareholder is a higher rate taxpayer, dividend tax at 35.75% on that £7,500 is £2,681.25. The total tax cost is therefore just over 51% of the original £10,000 profit.
By contrast, a £10,000 employer pension contribution can be deductible for corporation tax if it is made wholly and exclusively for the purposes of the business. There is no employer NIC and no personal income tax at the point of contribution. The trade-off is access. The director cannot use the money personally until pension access age, and pension withdrawals are taxed under the pension rules at that time.
The key constraints are the annual allowance, the tapered annual allowance for high earners, carry-forward rules, and the business purpose test for employer contributions. Personal contributions are also limited by relevant UK earnings, but employer contributions are not restricted in the same way.
For directors who do not need all profits as personal cash, pension funding is now one of the strongest levers available. Our piece on salary sacrifice pension changes covers the employer side, while HMRC PAYE issues covers administration. Our piece on protecting the family business with a family charter covers the longer-term succession context that pension planning often sits within.
BADR now applies at 18% for qualifying disposals made on or after 6 April 2026. The rate history is:
At 18%, BADR still offers a meaningful discount compared with the standard higher-rate capital gains tax rate of 24%. On a £1 million qualifying gain, BADR can save £60,000 compared with a 24% rate.
The practical question is whether capital extraction through an eventual sale, or a solvent winding-up, is more efficient than extracting profits as dividends over time. For owners approaching exit, the answer may still point towards preserving value for a BADR-qualified disposal rather than stripping profits through dividends beforehand.
Our pieces on how to prepare your business for sale, due diligence and its importance in business, and the indispensable role of chartered accountants in mergers and acquisitions cover the wider exit preparation. Our corporate finance team handles the transaction side.
The 18% rate only applies if the conditions are met. For shares in a trading company, the main points are usually:
The conditions are detailed and should be checked before any sale. Our specialist tax team works through the qualifying conditions before disposal, and our piece on the key financial KPIs every SME owner should be monitoring monthly covers the financial visibility that makes exit planning realistic.
For owners winding down a solvent company rather than selling it, a Members’ Voluntary Liquidation can still be a tax-efficient way to extract retained profits as capital rather than income. Distributions in an MVL are generally treated as capital proceeds and taxed as capital gains, with BADR available where the conditions are met.
At 18% BADR, an MVL can still be considerably more efficient than extracting equivalent profits as higher-rate dividends at 35.75%. The margin has narrowed, but the case often remains strong.
There are anti-avoidance rules to consider, particularly where a shareholder winds up a company and then carries on the same or a similar trade within 2 years. Our recovery and restructuring team handles solvent MVLs, while our piece on what an insolvency accountant does in business distress cases covers the wider formal insolvency landscape.
For owner-managers based in Northern Ireland or with business interests in the Republic of Ireland, the Irish dividend position is different.
Dividends paid by Irish companies to individual shareholders are treated as income and taxed at marginal income tax rates, with USC and PRSI where applicable. For a higher-rate taxpayer, the combined rate can reach around 52.1%, made up of 40% income tax, 8% USC and 4.1% PRSI. Dividend Withholding Tax at 25% may apply at source and is generally credited against the final liability.
There is no Irish equivalent of the UK’s £500 dividend allowance. This means the Irish company structure can be less efficient as a dividend extraction vehicle than a UK company, even after the UK’s April 2026 dividend tax rise.
For cross-border businesses where profits are earned in both jurisdictions, extraction strategy needs to be planned as one integrated position. The interaction of UK and Irish income tax, corporation tax, withholding tax, the double tax treaty and residence rules should not be managed in isolation. Our Cross-border tax specialists team works on exactly this kind of planning. Our pieces on common tax mistakes expats and cross-border businesses make and UK tax rules for individuals with income in multiple countries cover common errors in this area.
Salary, dividends and pensions are not the only options.
If you personally own premises used by the company, charging a commercial rent may be appropriate. The company can usually deduct the rent for corporation tax, while you report the rent personally as property income. This can be NIC-efficient, but the rent must be commercial and properly documented.
If you previously lent money to the company, repaying that loan is not usually income. It is repayment of capital owed to you. This can be a useful extraction route, but only up to the genuine amount owed.
Spousal employment or shareholding can also be efficient where there is commercial substance. A spouse or civil partner who genuinely works in the business can be paid a reasonable salary. A spouse who genuinely holds shares may receive dividends using their own allowances and tax bands. Arrangements without real commercial basis are more likely to attract HMRC scrutiny.
Once dividends have been received, ISA sheltering can protect future investment returns from dividend tax and capital gains tax. Our piece on the future of financial planning covers how these levers fit together, and our self-assessment tax returns guide covers the personal filing side.
For most owner-managers, the salary and dividend review is a routine annual exercise. For others, it reveals a deeper issue. The company may have paid dividends without adequate distributable reserves, the director loan account may have drifted into Section 455 territory, or retained earnings may have been extracted faster than cash flow can support.
Where extraction and business health are disconnected, that needs direct attention. Our piece on how recovery accountants help improve cash flow covers early intervention, and our recovery accounts UK team handles broader restructuring work. Our pieces on what an insolvency accountant does in business distress cases and what happens to creditors during company insolvency cover the territory where things have gone further.
Where historical dividends or director transactions come under HMRC or Revenue scrutiny, financial reconstruction can be detailed work. Our forensic accountants Northern Ireland team handles this, and our pieces on what a forensic accountant does and when you need one, forensic accounting in shareholder and partnership disputes, and red flags of financial fraud in SMEs explain where this work fits.
The April 2026 dividend and BADR changes sit alongside several other tax changes affecting owner-managers.
The Section 455 charge on relevant close company loans rose to 35.75% for loans made or benefits conferred on or after 6 April 2026.
The capital allowances main writing-down allowance rate dropped from 18% to 14% from 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax. Our business owner’s guide to capital allowances covers this.
Inheritance Tax relief for business and agricultural property changed from 6 April 2026, with 100% relief restricted to the first £2.5 million of combined qualifying agricultural and business property per individual, and 50% relief on qualifying value above that.
Making Tax Digital for Income Tax applies from April 2026 for those with qualifying self-employment and property income above £50,000, from April 2027 above £30,000, and from April 2028 above £20,000. Dividend income does not count towards MTD qualifying income, although it may still need to be reported on the final tax return where relevant.
The Bank of England held Bank Rate at 3.75% on 30 April 2026, keeping borrowing costs high for companies funding growth.
R&D tax relief continues under the UK merged scheme for accounting periods beginning on or after 1 April 2024. In Ireland, the R&D tax credit is 30% for many current periods, with a 35% rate applying to later claims where the specified return date is on or after 23 September 2027. Our pieces on what qualifies for R&D tax credits in the UK and Ireland and common mistakes businesses make claiming R&D tax relief cover the detail.
For broader strategic context, our pieces on why internal audit supports business growth, how to prepare your business for sale, and due diligence and its importance in business are useful alongside a remuneration review. For cross-border planning, tax planning for UK businesses expanding overseas and setting up a company in both the UK and Ireland cover structural considerations. For other reliefs, our piece on land remediation relief explained is also worth reading.
From 6 April 2026, the dividend basic rate is 10.75%, the dividend higher rate is 35.75%, and the dividend additional rate is 39.35%. The first £500 of dividend income remains tax free under the dividend allowance.
Business Asset Disposal Relief applies at 18% for qualifying disposals made on or after 6 April 2026. It was 14% for qualifying disposals between 6 April 2025 and 5 April 2026.
Often, yes, but it needs reviewing. Dividends still avoid National Insurance, but higher dividend tax and the 15% employer NIC rate make the salary level more sensitive than it used to be.
Employer pension contributions can be very efficient where the company can justify the contribution and the director does not need immediate access to the cash. They can be deductible for the company and are not taxed personally at the point of contribution.
For shares, you generally need to be an employee, director or officer, hold at least 5% of ordinary share capital and voting rights, meet one of the 5% economic tests, and satisfy the conditions for at least 24 months before disposal. The company must also be a trading company or holding company of a trading group.
Irish dividends are taxed as income, with income tax, USC and PRSI where applicable. A higher-rate Irish taxpayer can face an effective rate of around 52.1%, after credit for Dividend Withholding Tax. There is no Irish equivalent of the UK’s £500 dividend allowance.
The Section 455 charge is linked to the dividend upper rate. For relevant loans made or benefits conferred on or after 6 April 2026, the rate is 35.75%.
The April 2026 rate changes are a prompt for most owner-managers to review how they are paying themselves. The calculation across salary, dividends, pension contributions, director loans and exit planning is worth running properly once a year, not just when a problem appears.
As accountants Ireland and UK businesses rely on for owner-managed company tax planning, SCC Chartered Accountants works with directors across Northern Ireland, the Republic of Ireland and the wider UK. Our tax compliance and specialist tax teams handle the detailed calculations, our SME business solutions team keeps the wider operational picture in view, and our corporate finance team supports the exit and transaction conversations that BADR and MVL questions often lead to.
Get in touch with the SCC team for a remuneration review covering dividend, salary, pension and exit planning for 2026/27 and beyond.
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