Same Old Salary + Dividends = The Tax Man Smirks

You’re a director. You take a salary of £12,570 - nice and neat, that’s your personal allowance, so no income tax on that bit. Then the rest of what you withdraw from your company as dividends. You’ve done this before: minimal salary, dividends to make up the rest. Smooth.

But enter the 2025 Budget - and suddenly the tax man clears his throat. From 6 April 2026, the tax on dividends goes up:

• The basic rate dividend tax rises from 8.75% to 10.75%.

• The upper rate rises from 33.75% to 35.75%.

• The additional rate stays at 39.35%.

• The tax free dividend allowance remains £500 per year (which is basically HMRC saying "here, have a biscuit crumb").

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So if you were relying on dividends to pad out your income - brace yourself - those extra pennies now come at a slightly higher cost.

Running the Numbers: “You’ve Got Dividends - Enjoy the Extra 2%”

Let’s say you stick with your usual structure: £12,570 salary, the rest as dividends. Suppose you draw £40,000 total (so £12,570 salary + £27,430 dividends).

• The first £500 is still tax free.

• The remaining £26,930-ish is taxed at the new 10.75% basic rate (assuming you stay in basic rate territory).

• That’s around £2,899 in dividend tax.

• Previously you’d have paid about £2,352.

Difference: roughly £550 more now sliding gracefully into HMRC’s pocket.

It’s not devastating, but it’s definitely a small financial slap.

Alternatives for Paying Yourself (AKA “The Director’s Remuneration Buffet”)

If the dividend hike has made you clutch your spreadsheet a little tighter, here are some options to mix things up.

• Raise your salary a bit

You could increase your salary above £12,570.Pros: pensionable, mortgage friendly, predictable.Cons: extra tax and National Insurance, which nobody has ever described as “fun”.

• Use pension contributions

Your company can contribute straight to your pension.

Pros: reduces corporation tax, no dividend tax, future you will thank you.

Cons: current you does not get to buy new gadgets with pension money.

• Keep profits in the company

You can simply not take all the money out.

Pros: avoids higher dividend tax now, boosts working capital, makes you feel like you run a Serious Business.

Cons: less cash in your personal bank account for takeaways and impulse Amazon purchases.

• Mix and match

A bit of salary, a sprinkle of dividends, a dollop of pension, and maybe retaining a bit of profit.

Pros: flexible and tax efficient.

Cons: requires grown-up financial thinking (that’s what I’m here for).

Director’s Reflection: “Budget 2025 Made Me Cry a Little - But I Adapt”

The dividend tax increase is annoying, yes, but not catastrophic. The classic director approach - small salary, dividends to fill the gap - still works. It’s just slightly less smug than before.

In short: tweaks will help, planning will help more, and ignoring it will definitely not help.

Want to Discuss Your Own Remuneration Strategy?

If you’d like to run through your situation, model your numbers, or just want reassurance that HMRC isn’t personally out to get you (even though it sometimes feels like it), get in touch with me and I’ll be happy to help.

Just drop me a message and we’ll go through your best options.