Dividend Planning 2025/26: Maximising Tax Efficiency Before April 2026
Why This Is the Most Important Year Yet for Profit Extraction
The 2025/26 tax year offers a narrowing window for company directors and shareholders to extract profits from their businesses in a tax-efficient way. With the dividend allowance already at its lowest point in over a decade, and government pressure mounting to further align dividend tax rates with income tax, it’s increasingly important to act before April 2026.
For owner-managed businesses, understanding how to balance salary, dividends, pension contributions and retained earnings is essential to minimising tax exposure. The dividend system remains viable — but with tighter margins, smaller allowances, and rising compliance, strategy now plays a central role.
If you’re a company director or shareholder, this is the time to review your remuneration plan and determine how best to optimise extraction in the final months of this tax year.
Dividend Allowance in 2025/26
From 6 April 2025, the dividend allowance remains at £500, having been cut from £1,000 the year before and £2,000 the year before that.
This means that the first £500 of dividend income each year is tax-free. Dividends above that are taxed at the following rates:
- 8.75 percent (basic rate band)
- 33.75 percent (higher rate band)
- 39.35 percent (additional rate band)
Example: A shareholder taking £40,000 in dividends (after the £500 allowance) and with no other income would pay approximately £3,500 in dividend tax.
These rates remain unchanged for now — but with the government already reviewing how dividends are taxed, there is a strong possibility of an increase in April 2026, particularly for higher earners and family company shareholders.
Should You Bring Forward Dividends?
Where profits exist, accelerating dividends into the current tax year may be a smart move. If dividend tax rates increase or allowances are cut further in 2026, you will have paid tax at a lower rate by drawing income now.
Key questions to ask include:
- Are you planning a major dividend or profit distribution in the next 18 months?
- Do you expect your income to rise into the higher or additional rate bands?
- Can your company afford to distribute retained earnings this year?
Even modest dividends, if taken earlier, can lock in lower rates and reduce the cumulative tax bill. However, care must be taken not to exceed personal allowances or push income into higher bands unnecessarily.
Merranti can model different timings and amounts to help maximise your after-tax income.
Salary vs Dividend: 2025/26 Considerations
The classic director remuneration strategy involves a low salary (to secure National Insurance credits) and dividends for the remainder. This structure remains valid, but the figures have changed:
- Primary NI threshold remains at £12,570
- Employer NI threshold reduced to £5,000
- Employer NI rate increased to 15 percent
This means directors should revisit whether the “optimum salary” has shifted. For many, a salary of £9,100 or £12,570 still works — but employer costs now apply sooner.
After salary, dividends remain more tax-efficient than additional salary in most cases, as they are not subject to National Insurance. However, for some higher earners, the combination of reduced dividend allowances and increased corporation tax may tip the balance toward pension contributions or structured bonuses.
Tax Bands and Dividend Traps
When planning dividends, it’s vital to know which tax bands apply and how close you are to crossing thresholds. For 2025/26:
- Basic rate band: Up to £50,270
- Higher rate: £50,271 to £125,140
- Additional rate: Over £125,140
Watch out for the personal allowance taper for incomes over £100,000. For every £2 over the threshold, you lose £1 of personal allowance — effectively creating a marginal rate over 60 percent in some cases.
Dividends that push income into this band may result in significantly higher tax than expected.
Merranti can help with income splitting, timing strategies and adjusting salary/dividend mix to keep income in the most efficient band.
Dividends from Retained Profits: Watch the CT Interaction
Company profits are now subject to corporation tax at 25 percent for most businesses with profits over £50,000. Once taxed, profits can then be distributed as dividends — which are then taxed again at the personal level.
Effective combined rates (corporation tax + dividend tax) are now:
- Basic rate dividend: 38.75 percent
- Higher rate dividend: 50.31 percent
- Additional rate dividend: 54.01 percent
These figures make it clear that dividend extraction is no longer as light-touch as it once was. That said, compared to taking all income as salary (with 47 percent+ PAYE and NI), the strategy still saves tax if carefully managed.
Use of Spouse or Family Shares
If your spouse or civil partner is a shareholder and has lower earnings, dividends can be split across both to make use of each person’s:
- £500 dividend allowance
- £12,570 personal allowance
- Basic rate tax band
This is particularly valuable where only one partner actively works in the business. But the shares must represent a genuine economic interest. Artificial dividend splitting can fall foul of anti-avoidance rules (settlements legislation), so proper documentation is essential.
We recommend reviewing share structures now to ensure they still reflect current roles and income needs.
Pension Contributions vs Dividends
In many cases, making employer pension contributions is now more tax-efficient than taking dividends. Key benefits include:
- Corporation tax relief on the full contribution
- No National Insurance
- No dividend tax
- Tax-free growth within the pension
- Immediate access from age 55 (57 from 2028)
A £40,000 employer pension contribution, for example, can be made gross from profits — saving 25 percent corporation tax — while building retirement wealth.
Merranti works with financial advisers to help you decide whether to extract profits now or shelter them for future drawdown.
Key Facts About Dividend Planning in 2025/26
The dividend allowance remains at £500 in 2025/26. Dividend tax rates are unchanged but under review, and higher corporation tax reduces the net benefit of dividends. Directors should review salary/dividend splits and consider pension contributions for greater tax efficiency. Family companies may use income splitting across spouses but must comply with anti-avoidance rules. Accelerating dividends before April 2026 could reduce exposure to likely future rate rises.
How Merranti Accounting Can Help
Our team helps company directors and shareholders make tax-efficient decisions with real financial impact.
We can support you with:
- Dividend vs salary modelling for 2025/26
- Personal tax planning around dividend bands and thresholds
- Dividend acceleration advice before April 2026
- Spouse shareholding and income splitting strategies
- Corporate pension contribution advice in conjunction with IFAs
Don’t let tax drag erode your hard-earned profits. If you’re planning to take dividends, bonuses or make large contributions this year, speak to us first.
Call: 01342 836 557
Email: contactus@merranti.com
