Dividend Allowance Cut: What It Means for Small Business Owners

Overview

The current Dividend Allowance is now only to £500 per person. So Small company directors/shareholders are seeing more of their dividend income taxed.

Background Information

The allowance has shrunk from £5,000 (2016/17) to £2,000, then £1,000, and now £500. Dividends remain more tax-efficient than salary but planning is vital.

Dividend Tax Rates 2025/26

Band	Tax Rate
Basic rate	8.75%
Higher rate	33.75%
Additional rate	39.35%

Planning Ideas

• Use spouses’ allowances (each gets £500 allowance plus personal allowance and bands).

• Spread dividends across tax years.

• Consider employer pension contributions instead of dividends.

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Example:A director takes £30,000 dividends on top of £12,570 salary. Only £500 is tax-free; the rest is taxed at 8.75% then 33.75% as bands are used up.

For tailored tax advice on subjects like the above you can book in a free discovery call with one of our tax team here to see how we can help. https://calendly.com/flowaccandtax/discoverycall"