There can be significant advantages to tax planning surrounding the timing of extracting dividends prior to 5 April each year.
Dividend tax rates for 2025–26
Dividends are taxed as follows:
- First £500 of dividends are tax-free
- Dividends within the basic rate band are taxed at 8.75%
- Dividends within the higher rate band are taxed at 33.75%
- Dividends at additional rate are taxed at 39.35%
Optimising your dividend position
Firstly, aim to fully utilise your basic rate band, if company reserves allow. If you can use up your basic rate band across tax two years, rather than going into higher rate in one period, you will save significant tax.
For example:
If your total income in 2025-26 is £30,000 (leaving £20,270 of unused basic rate band), and £60,000 in 2026–27 (pushing you into higher rate tax), you could reduce your overall tax liability by equalising income across both years.
Similarly, if you’ve already exceeded your basic rate band in 2025–26 and expect lower income in 2026–27, consider delaying further dividends until after 5 April to avoid unnecessary higher rate tax.
Important: Dividends can only be paid if the company has sufficient post-tax reserves. If reserves are insufficient, the dividend is invalid.
To determine how much dividend you can take while staying within the basic rate band:
- Start with:
- Personal allowance: £12,570
- Basic rate band: £37,700
- Total: £50,270
- Add:
- Gross personal pension contributions (net amount × 100/80)
(Do not include employer contributions and salary sacrifice arrangements)
- Gross personal pension contributions (net amount × 100/80)
- Deduct:
- Gross salary
- Other taxable income (e.g. rental income, self-employment, other jobs)
- Dividends already taken
The result is your remaining basic rate band available for dividends.
If the company lacks cash but has sufficient reserves, dividends can still be voted and credited to your director’s loan account. This will then be a loan the company owes that can be repaid later without any further tax consequences.
Pension
You also have a £60,000 pension annual allowance (employee or employer contributions) available and you can check this on HMRC’s website here. We cannot advise on pensions as an investment, you would need to speak to an Independent Financial Advisor (IFA) for this, however company paid pensions can be very advantageous from a tax perspective.
Don’t lose …
Child Benefit
Applicable if receiving child benefit and the highest earner exceeds £60,000
If you or your partner receives child benefit and one of you earns over £60,000 some or all of this may need to be repaid. Once adjusted net earnings exceeds £80,000 all of the child benefit received will be payable.
Personal pension contributions and Gift Aid donations reduce adjusted net income so if you are considering making these in the future you might wish to make these prior to 5 April to bring you below this threshold.
Personal Allowance
Applicable if income exceeds £100,000
For every £2 that your adjusted net income exceeds £100,000 the £12,570 personal allowance is reduced by £1. This restriction results in you effectively being taxed at 60% on income between £100,000 and £125,140.
Personal pension contributions and Gift Aid donations reduce adjusted net income so if you are considering making these in the future you might wish to make these prior to 5 April to bring you below this threshold.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
