Dividend Tax Planning for Small Business Owners in 2025/26

How to reduce your tax bill and pay yourself more efficiently

The 2025/26 tax year has brought continued pressure on company directors.  With the dividend allowance at just £500, it makes tax planning more important than ever.

At Shepherd Partnership we help business owners across all industries get the most from their company income. Careful planning can make a real difference.

Salary vs. Dividends: Get the Balance Right

• Take a modest salary, to maintain your National Insurance record and reduce corporation tax

• Top up with dividends, which aren’t subject to National Insurance and are taxed at lower rates.   They also offer the flexibility of timing.

Many of our clients take a salary up to their tax and National Insurance thresholds, then draw the rest as dividends for maximum efficiency, although each business is unique and there is not just one profit extraction policy which fits all.

Good planning can help avoid tax traps such as:

• 60% tax trap for income in the £100,000 to £125,140 bracket

• The cliff edge of losing Tax Free Childcare when income tips over £100,000

• Having to pay the High Income Child Benefit Charge where income exceeds £60,000

Timing Is Key

Time your dividends wisely: Consider when to declare dividends in the context of your personal income level and tax banding.

Use Spousal Allowances

If your spouse or civil partner is a shareholder, splitting dividends between you can save tax by doubling your £500 tax-free allowances and keeping more income in lower rate tax bands

Don’t Overlook Pensions as an alternative to dividends

Employer pension contributions:

• Reduce your company’s corporation tax

• Aren’t subject to National Insurance

• Grow in a tax-efficient environment

A mix of salary, dividends, and pension contributions often delivers the best tax outcome.

Stay Compliant

You’ll need to report dividend income to HMRC, keep board minutes, issue dividend vouchers, and ensure you only pay from genuine profits.

Are you ready to revisit your pay strategy to ensure it remains right for you?

We are here to help you extract profits in the most tax efficient way. 

Please get in touch our managing director, Adam Dutton, who would love to talk to you about how we can help.