Dividends – Planning Before 5 April and Looking Ahead to 2026/27
Reviewing company finances and dividend planning before the tax year end.
For many owner-managed companies, dividends are a key part of how income is taken from the business.
As we approach the end of the tax year on 5 April, it’s a good time to review how and when dividends are declared, particularly with the change in dividend tax rates from April 2026.
Dividends Can Only Be Paid From Available Profits
Dividends are not simply drawings from the business - they are distributions of profit.
A company can only pay a dividend if it has sufficient retained profits at the time the dividend is declared.
You cannot:
pay dividends from future expected profits,
create or increase a loss by declaring a dividend,
treat ad-hoc withdrawals as dividends later.
If dividends are taken without available profits, they may instead be treated as an overdrawn director’s loan account, which can lead to additional tax consequences.
Interim Dividends Mean Keeping Records Up to Date
Most dividends taken by owner-managed companies are interim dividends. These are declared by the directors during the financial year, based on current financial information showing that sufficient distributable profits are available.
To support these, there should be:
up-to-date management accounts,
evidence that profits exist at that date,
a clear record showing the dividend is justified.
This doesn’t require full year-end accounts each time, but there must be reasonable financial evidence behind the decision.
Keeping records current makes this much easier, and this is something we can help you maintain as part of your ongoing accounting support.
Dividends Must Be Properly Declared
Even for a sole director/shareholder company, dividends must follow a formal process:
A decision to declare the dividend (a board minute).
A record of the amount approved.
A dividend voucher issued to the shareholder.
Correct recording in the accounting records.
This documentation provides evidence that the dividend has been declared correctly if ever reviewed.
Dividends Are Taxed as the “Top Slice” of Income
Dividends are taxed differently from salary because they sit on top of your other income.
HMRC taxes income in the following order:
Salary, trading profits, rental income and pensions.
Savings income such as interest.
Dividends last - as the top slice of income.
This means dividends are taxed based on where your total income has already reached in the tax bands, which is why the mix and timing of income can affect the overall tax position.
Dividend Tax Rates for 2025/26
For the 2025/26 tax year, the dividend allowance is £500, meaning the first £500 of dividend income is taxed at 0%.
Dividends within basic rate tax band are taxed at 8.75%
Dividends within higher rate tax band are taxed at 33.75%
Dividends within additional rate tax band are taxed at 39.35%
Income Tax Bands (for Context)
Dividend tax rates depend on your total income for the year, as dividends sit on top of other earnings.
For 2025/26 (and continuing into 2026/27), the main thresholds are:
Personal Allowance: £12,570
Basic rate band: up to £50,270 total income
Higher rate band: £50,271 to £125,140
Additional rate: over £125,140
Because these thresholds have been frozen for several years, inflation means more income can gradually fall into higher tax bands even where profits have only increased modestly in real terms.
Changes From 6 April 2026 (2026/27 Tax Year)
From the start of the 2026/27 tax year, dividend tax rates will increase:
Dividends within basic rate tax band will be taxed at 10.75%
Dividends within higher rate tax band will be taxed at 35.75%
Dividends within additional rate tax band will be taxed at 39.35%
The dividend allowance remains £500.
This means dividends taken before and after 6 April 2026 may be taxed at different rates.
Why Timing Around the Tax Year End Matters
Because each tax year is treated separately:
A dividend declared before 5 April falls into one tax year.
A dividend declared after 6 April falls into the next - potentially at a different tax rate.
Where companies have flexibility, reviewing timing can help ensure income is taken deliberately rather than by default.
That said, dividends should never be accelerated purely for tax reasons without confirming profits and overall suitability.
A Good Time to Review, Not Rush
The period leading up to the tax year end is a sensible opportunity to check:
whether profits support dividends,
whether records are up to date,
and whether income is being taken in the most appropriate way.
Need Help Reviewing Your Position?
If you would like to review dividends before the year end, or ensure everything is documented correctly, we would be happy to help, just get in touch.