Upcoming changes to dividend tax rates for the 2026/27 tax year are expected to have a significant impact on small and medium-sized business (SME) owners across the UK. With a 2 percentage point rise in both the basic and higher rate bands, now is the ideal time to reassess how you draw profits from your business.
At MCC Accountants, we support directors and shareholders in adapting their tax strategies to reflect legislative changes. Here’s a clear overview of what’s changing—and how you can prepare.
What Are the Dividend Tax Changes for 2026/27?
From April 2026, dividend tax rates are set to increase:
- Basic rate: 8.75% → 10.75%
- Higher rate: 33.75% → 35.75%
- Additional rate: 39.35% → 41.35%
📌 Although the dividend allowance remains limited, these higher rates mean that shareholders will pay more tax when taking profits as dividends.
Why This Is Important for SME Owners
For many SME directors, dividends remain a core method of extracting profits in a tax-efficient way. However, with rising rates and reduced allowances over recent years, the tax advantage of dividends is gradually shrinking.
Key impacts include:
- Increased personal tax liabilities on dividend income
- Reduced efficiency of traditional dividend-based strategies
- A greater need for forward-thinking tax planning
This is especially relevant for owner-managed businesses that rely on a low salary plus dividends model.
The Wider Context: Growing Tax Pressures on SMEs
The increase in dividend tax is part of a broader shift in the UK tax landscape affecting business owners, including:
- Cuts to dividend allowances in recent years
- Higher Corporation Tax rates (up to 25%)
- Greater scrutiny of how profits are extracted
Collectively, these changes mean that standard approaches may no longer deliver the same tax advantages.
What Should SME Directors Be Doing Now?
Rather than waiting for the changes to take effect, business owners should take proactive steps now.
1. Reassess Your Remuneration Mix
Review the balance between salary, dividends, and other income streams. In some cases, a higher salary may become more practical despite National Insurance implications.
2. Review Dividend Timing
If appropriate, consider issuing dividends before April 2026 to take advantage of current, lower tax rates.
3. Make Full Use of Allowances
Ensure you are maximising all available allowances, including:
- Dividend allowance
- Personal allowance
- ISA allowance for tax-free investment growth
4. Consider Structural Changes
Depending on your situation, restructuring may improve tax efficiency. This could include:
- Reviewing your business structure (limited company vs sole trader)
- Introducing family members as shareholders where appropriate
- Retaining profits within the company for reinvestment
5. Prepare for Cash Flow Implications
Higher tax on dividends will reduce net income. Planning ahead helps avoid unexpected tax bills and supports better financial management.
Dividend vs Salary: Is It Still Worth It?
Dividends are still likely to be more tax-efficient than salary in many scenarios—but the benefit is narrowing.
The focus should now shift from simply choosing dividends to:
👉 Creating the most tax-efficient combination based on your personal and business circumstances
Tailored advice is key to getting this balance right.
How This Fits Into Your Wider Financial Planning
As dividend taxation becomes less favourable, SME owners should take a more holistic approach to financial planning, including:
- Pension contributions (tax-efficient and long-term focused)
- ISAs for tax-free income and growth
- Reinvesting profits into the business
- Exit strategies and capital gains tax planning
Final Thoughts: Act Early to Stay Tax Efficient
The planned dividend tax increase for 2026/27 highlights the importance of staying ahead of tax changes.
If dividends form a key part of your income, taking action now can help you:
- Minimise future tax liabilities
- Optimise how you extract profits
- Safeguard your long-term financial position
Speak to the Experts
At MCC Accountants, we help SME owners navigate evolving tax rules and build effective, forward-looking strategies.
👉 Contact us today to review your dividend strategy ahead of the 2026/27 changes and ensure your business remains as tax-efficient as possible.
