How to Pay Less Tax on Dividends in 2025/26: Director Planning Tactics

If you’re a company director or shareholder, you’ve likely felt the tightening grip of dividend taxation in recent years — and 2025/26 continues that trend. With the dividend allowance slashed to just £500 and new dividend tax rate increases coming into force from April 2026, it’s more important than ever to plan how you extract profits from your company.

This guide sets out how dividend tax works in 2025/26, what’s changing next year, and practical strategies to legally reduce your tax bill while staying compliant.

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What Are the Dividend Tax Rates in 2025/26?

Dividends are taxed at special rates and sit on top of your other income, meaning the amount of tax you pay depends on your total income for the year.

Here are the dividend tax rates for 2025/26:

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

These apply after the following:

• Your Personal Allowance (usually £12,570)
• The £500 dividend allowance (2025/26)
• All other taxable income (salary, rental income, etc.)

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What’s Changing? Autumn Budget 2025 Update

In the Autumn Budget announced in November 2025, the Chancellor confirmed that dividend tax rates will rise from 6 April 2026, affecting income received in the 2026/27 tax year.

Confirmed Rate Increases from April 2026:

The £500 dividend allowance remains frozen — no increase was announced.

This change means that from April 2026, many owner-directors will pay more tax on the same amount of dividends, especially if they fall into the basic or higher-rate brackets.

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Why This Matters for Owner-Managed Businesses

For directors taking a small salary and top-up dividends, the dividend tax hike will directly reduce post-tax income. It also makes timing and structuring decisions around dividend payments even more critical.

Fortunately, there are still planning strategies you can use before 5 April 2026 to minimise exposure.

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1. Bring Forward Dividends Before the Rate Increase

Because dividend tax is applied in the tax year the dividend is declared, you have a planning window to act before the rates rise.

If you anticipate a large dividend — or usually extract significant profits annually — consider declaring dividends before 6 April 2026 to lock in the current lower rates.

Example:

If you’re a basic rate taxpayer, the difference between the current and future rates is 2%. On a £30,000 dividend, that’s an extra £600 in tax if paid after April 2026.

For higher-rate taxpayers, the extra cost rises to £600 per £30,000 of dividends. For regular profit extraction, this could compound quickly.

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2. Use Your Spouse or Civil Partner’s Allowances

Married couples and civil partners can reduce their joint dividend tax liability by:

• Transferring shares (tax-free between spouses) to equalise income
• Allowing both to use their £500 dividend allowance
• Spreading dividends across both taxpayers’ personal allowances and lower tax bands

This strategy is especially powerful if one spouse has little or no other income.

Example:

If your spouse earns no income, they can receive:

• £12,570 (Personal Allowance)
• £500 (Dividend Allowance)
• Up to ~£1,000 of dividends taxed at just 8.75%

By contrast, if all dividends are paid to the higher-earning spouse, much of the income may be taxed at 33.75% or 39.35%.

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3. Balance Salary and Dividends for Optimum Tax Efficiency

Most owner-directors take a small salary, up to the National Insurance threshold, with the rest as dividends. This reduces exposure to NICs while still using the Personal Allowance.

For 2025/26:

• The Primary NIC threshold is £12,570 (employee)
• The Secondary threshold is £9,100 (employer)
• If eligible, you can claim the Employment Allowance of £10,500 to cover employer NICs

Consider:

• Paying a salary just under or up to £12,570
• Using the Employment Allowance to remove employer NIC cost
• Reducing dividends accordingly to stay within lower tax bands

This salary/dividend mix allows both personal and company tax efficiency.

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4. Consider Retaining Profits Until a Future Tax Year

If your personal income is temporarily high, or you’re approaching a tax band threshold, consider retaining profits within the company for future extraction.

Dividends are only taxed when declared, so you may choose to:

• Defer dividends until your income drops (e.g. post-retirement)
• Use profits for company pension contributions instead
• Reinvest in the business or acquire new assets

Just remember: corporation tax will still apply to retained profits — but dividend tax isn’t due until the money is taken out.

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5. Use ISA Allowances for Dividend-Producing Investments

If you hold personal investments that pay dividends (e.g. listed shares), move them into an ISA to shield income.

• The ISA limit is £20,000 per person, per year
• Dividends received within an ISA are completely tax-free
• Over time, this can create a significant pool of tax-free investment income

This doesn’t help for company dividends — but it’s useful for landlords or business owners with private investment portfolios.

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6. Look at Pension Contributions as an Alternative

Pensions are one of the most tax-efficient ways to extract company profits, especially for directors who don’t need income now.

• Company pension contributions are deductible for corporation tax
• No NICs are due on pension contributions
• You benefit from tax-free growth and tax-free 25% lump sum on withdrawal

For 2025/26:

• The annual pension allowance is £60,000
• There is no Lifetime Allowance following its abolition in April 2024

A pension contribution instead of a dividend could save you both income tax and dividend tax — while securing long-term benefits.

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7. Use Alphabet Shares to Split Dividends Flexibly

If you want to pay different dividends to different people (e.g. family members or directors), Alphabet shares may be the solution.

Each class of shares (e.g. “A”, “B”, “C”) can receive different levels of dividends, giving you flexibility in how income is distributed.

This must be set up properly in the company’s Articles and shareholder agreements — and HMRC rules on settlements and avoidance must be respected.

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Final Thoughts

Dividend tax is rising, and allowances are shrinking. But with planning, you can still extract income from your business in a tax-efficient way.

Action Checklist for 2025/26:

•  Use your £500 dividend allowance
•  Consider paying dividends before 6 April 2026 to beat the rate rise
•  Review salary/dividend mix and utilise the Employment Allowance
•  Split income with a spouse where possible
•  Retain profits or use pensions for long-term tax efficiency
• Keep all paperwork (dividend vouchers, minutes) up to date

As always, the best strategy depends on your full income position, your goals, and your business structure,