The New Tax Year Has Started. Here Is How to Plan Your Dividends Properly This Time.
- kimberleylock
- Apr 10
- 15 min read
Published by Lock & Ledger | www.lockandledger.co.uk Last updated: 10 April 2026
The 2026/27 tax year began on 6 April, and it brought with it the first increase in dividend tax rates since 2022. If you are a director of an owner-managed business, this is not something to deal with in March 2027. It is something to plan for now.
Every year, we see the same pattern at Lock & Ledger. Directors who left their tax planning until the final weeks of the year scrambling to declare dividends, unsure whether they had enough distributable reserves, unclear on how the personal allowance taper works, and often discovering that they have already overdrawn their director's loan account with no supporting paperwork. By that point, most of the planning opportunities have already been missed.
This year does not have to follow that pattern. With the right budget in place and a clear understanding of how interim dividends, payments on account, and the personal allowance taper interact, you can spread your tax burden across the year, avoid unpleasant surprises, and keep more of what your business earns.
This guide sets out everything an SME director needs to know to plan the 2026/27 tax year properly, starting today.
Not sure where you stand? We offer a free, no-obligation 30-minute call to help you map out your dividend and tax position for 2026/27. Book your call at www.lockandledger.co.uk |
Why This Year Is Different: The New Dividend Tax Rates
From 6 April 2026, dividend tax rates for basic and higher rate taxpayers have each risen by 2 percentage points. These increases were confirmed in the Autumn Budget and enacted under the Finance Act 2026.
Tax band | 2025/26 Rate | 2026/27 Rate | Change |
Basic rate (income £12,571 to £50,270) | 8.75% | 10.75% | +2% |
Higher rate (income £50,271 to £125,140) | 33.75% | 35.75% | +2% |
Additional rate (income over £125,140) | 39.35% | 39.35% | No Change |
Dividend allowance | £500 | £500 | No Change |
What does the 2% rise actually cost
These are not dramatic figures in isolation, but combined with the personal allowance taper, frozen income tax thresholds, and the impact of payments on account, they add up. And they make proper planning throughout the year far more valuable than a last-minute rush in March.
Annual Dividend (Above £500 Allowance) | Extra Tax at Higher Rate |
£30,000 | £600 |
£50,000 | £1,000 |
£80,000 | £1,600 |
Start With a Budget. Seriously.
This is the single most important piece of advice in this entire article, and it is the one most frequently ignored by owner-managed businesses.
A surprising number of SME directors operate without a formal budget. They know roughly what the business earns, they have a sense of what it costs to run, and they draw money when they need it. The problem is that this approach makes dividend planning almost impossible, because you cannot plan dividends without knowing three things:
What are the company's expected profits for the year? Dividends can only legally be paid from distributable reserves, which are the company's cumulative realised profits minus its cumulative realised losses (Source: ICAEW, "Paying dividends: the essentials").
A dividend declared without sufficient reserves is unlawful, and directors may be personally liable to repay it.
What will your total personal income be? Your salary, dividends, and any other income all count towards your adjusted net income. If that total exceeds £100,000, your personal allowance begins to taper.
If it exceeds £125,140, the allowance is gone entirely. You need to know where you are heading before you get there.
What are the company's cash requirements? Having distributable reserves on paper does not mean the company has the cash to fund a dividend. You need to consider working capital, VAT liabilities, corporation tax payments, loan repayments, and any planned capital expenditure.
A budget that covers the full tax year, updated quarterly against actual results, gives you the visibility to answer all three questions. It allows you to plan interim dividends at regular intervals rather than leaving everything to the year end. And it ensures you never find yourself in the position of having declared a dividend that the company cannot legally support.
At Lock & Ledger, building and maintaining this kind of budget is one of the core services we provide as a fractional finance director. It is not complicated, but it does need to be done properly, and it needs to be kept current.
Need a budget for your business? Building a tax-aware budget is one of the first things we do with every client. If you have never had a proper budget in place, or your current one does not cover your personal tax position, we can help. Talk to us at www.lockandledger.co.uk |
Taking Interim Dividends Throughout the Year
Many directors think of dividends as a once-a-year event, declared at the end of the financial year. In practice, there is no restriction on how often a company can declare interim dividends. You can declare them monthly, quarterly, or at whatever interval suits your business (Source: HMRC, CTM15205).
Interim dividends are declared by the directors (not the shareholders) and can be paid at any time during the year, provided the company has sufficient distributable reserves at the point of each declaration.
Why does this matter for tax planning?
Because taking regular interim dividends, rather than one large annual dividend, gives you far more control over your personal tax position. Here is why:
Spreading income across the year helps you stay within tax bands.
If you take £60,000 in dividends in one go in March, your total income for the year is set in stone. If you take £5,000 per month, you can monitor your cumulative position and adjust. If a new contract or unexpected income pushes you towards a higher band, you can pause or reduce your dividends for the remaining months.
It protects against the distributable reserves trap.
The ACCA has noted that unlawful dividends commonly occur when directors draw money before accounts are prepared and then discover that sufficient reserves do not exist (Source: ACCA Global, "Avoiding the pitfalls of unlawful dividends," May 2021). By taking smaller, regular dividends and checking your management accounts each time, you significantly reduce this risk.
It supports better cash flow management.
Regular, predictable drawings are easier for the business to absorb than a single large withdrawal. This is particularly important if the company has seasonal revenue patterns or needs to retain cash for specific commitments during the year.
Important: get the paperwork right every time.
Every interim dividend must be supported by board minutes recording the directors' decision and a dividend voucher for each shareholder. HMRC's guidance is clear that an interim dividend is only treated as "paid" when it is placed unreservedly at the shareholder's disposal, which typically means when the appropriate entries are made in the company's books (Source: HMRC, CTM15205). If the bookkeeping entries are not made until a later period, the tax point moves to the later period.
Interim Dividend Checklist: Get This Right Every Time Before declaring each interim dividend, confirm:
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The £100,000 Personal Allowance Trap: Plan for It, Do Not Walk Into It
This is the tax planning issue that catches more directors off guard than any other. If you are a non-finance director running a profitable SME, there is a very good chance this applies to you, and an equally good chance you do not know about it.
Every UK taxpayer receives a personal allowance of £12,570, the amount of income you can earn before paying any tax. However, once your adjusted net income exceeds £100,000, this allowance is reduced by £1 for every £2 of income above the threshold. By the time your income reaches £125,140, the personal allowance has been completely eliminated (Source: House of Commons Library, Research Briefing CBP-10237, April 2026).
The effect is an effective marginal tax rate of 60% on income between £100,000 and £125,140. Add National Insurance at 2% and the combined rate reaches 62% (Source: St. James's Place, "How you can beat the 60% tax trap," December 2025).
According to HMRC estimates, around 1.95 million taxpayers lost some or all of their personal allowance in 2025/26, rising to 2.06 million in 2026/27. Income tax thresholds remain frozen until at least April 2028, and the Government has signalled they may stay frozen until 2031 (Source: Rathbones, "£100k tax trap to hit 2.3m taxpayers by 2029," November 2025).
Why does this matter for dividend planning?
Because dividends count towards your adjusted net income. A director who takes a salary of £12,570 and dividends of £90,000 has a total income of £102,570. That is enough to trigger the taper, costing an additional £1,028 in tax through the loss of £2,570 of personal allowance.
Push the dividends to £115,000 and the total income reaches £127,570, wiping out the personal allowance entirely. The tax cost of losing the full £12,570 allowance is £5,028 (£12,570 at 40%).
The planning opportunity:
If you build your budget at the start of the year and model your total income, you can see exactly where you stand in relation to the £100,000 threshold. You then have the full year to take action:
Pension contributions reduce your adjusted net income. In the taper zone, the effective tax relief on pension contributions is 60%, making them exceptionally efficient. The annual allowance is £60,000, and you may be able to carry forward unused allowance from the previous three years (Source: J.P. Morgan Personal Investing, "60% Tax Trap Calculator").
The 60% trap in Numbers
Your Total Income | Personal Allowance Remaining | Tax Lost Through Taper |
£100,000 | £12,570 (full) | £0 |
£105,000 | £10,070 | £1,000 |
£110,000 | £7,570 | £2,000 |
£115,000 | £5,070 | £3,000 |
£120,000 | £2,570 | £4,000 |
£125,140+ | £0 | £5,028 |
Total income includes salary, dividends, rental income, savings interest, and most other taxable income. Source: House of Commons Library, CBP-10237 | HMRC — Income Tax rates and Personal Allowances
Timing dividends across the year allows you to stop taking dividends if your income from other sources (salary, rental income, interest) is higher than expected, keeping you below the £100,000 threshold.
Splitting income with a spouse, where they hold shares in the company, can keep both individuals below the taper zone.
None of these strategies work if you only look at the numbers in March. They require forward planning, which starts with a budget.
Is your income heading towards £100,000 this year? Most directors do not find out until it is too late. We model this for our clients at the start of the year so they can make informed decisions about dividends and pension contributions throughout 2026/27. Get in touch at www.lockandledger.co.uk |
Payments on Account: The Cash Flow Shock That Catches First-Timers
If your Self Assessment tax bill exceeds £1,000 (after deducting tax paid at source through PAYE), HMRC requires you to make payments on account towards the following year's tax. This catches many directors off guard, particularly when their dividend income increases significantly from one year to the next.
How payments on account work:
HMRC calculates each payment on account as 50% of the previous year's Self Assessment liability. The first payment is due on 31 January during the tax year, and the second on 31 July after the tax year ends (Source: GOV.UK, "Understand your Self Assessment tax bill: Payments on account").
So if your 2025/26 Self Assessment tax bill is £10,000, you will owe:
£10,000 for 2025/26, due by 31 January 2027
Plus a first payment on account of £5,000 towards 2026/27, also due 31 January 2027
Plus a second payment on account of £5,000, due 31 July 2027
That means on 31 January 2027, you are paying £15,000 in total: the full bill for the previous year plus half of the estimated bill for the current year. If you were not expecting that, it can be a significant cash flow problem.
Key Payment Dates for 2026/27
Date | What Is Due |
31 January 2027 | 2025/26 balancing payment + first payment on account for 2026/27 (50% of 2025/26 liability) |
31 July 2027 | Second payment on account for 2026/27 (50% of 2025/26 liability) |
31 January 2028 | 2026/27 balancing payment + first payment on account for 2027/28 |
Why this matters for dividend planning:
When you model your budget for the year, you need to account not just for the tax on your 2026/27 income, but also for the payments on account that will be triggered by your 2025/26 return. If your dividend income increased significantly in 2025/26, the payments on account due in January and July 2027 could be substantially higher than you are used to.
You should also know that if you expect your 2026/27 income to be lower than 2025/26, you can apply to HMRC to reduce your payments on account using form SA303 or through your online account (Source: GOV.UK, "Understand your Self Assessment tax bill: Payments on account").
But be cautious: if you reduce them too much and your actual income turns out to be higher, HMRC will charge interest on the shortfall from the original due date.
The practical takeaway:
Set aside money for your tax payments throughout the year. Many of our clients at Lock & Ledger maintain a separate savings account specifically for personal tax. A simple rule of thumb is to set aside 25% to 30% of each dividend payment you receive. If your total income is near or above the higher rate threshold, 35% may be more appropriate. Do this every time you take a dividend, not once a year when the bill arrives.
Practical Tip: Set Up a Tax Savings Account Open a separate savings account and transfer a percentage of every dividend you receive into it. As a rule of thumb: 25% to 30% if your total income is in the basic or lower higher rate band. 35% or more if your income is near or above £100,000. This means the cash is there when the bill arrives in January, rather than scrambling to find it. |
Your Records Must Match: New HMRC Reporting Rules for 2025/26 Onwards
From the 2025/26 tax year, HMRC has introduced enhanced reporting requirements for directors of close companies. A close company is any company controlled by five or fewer shareholders or by its directors, which covers the vast majority of owner-managed businesses.
Under The Income Tax (Additional Information to be included in Returns) Regulations 2025, directors must now disclose the following on their Self Assessment tax return (Source: ICAS, "New reporting requirements for close company dividends," 2025):
The name and Companies House registration number of the close company.
The amount of dividend income received from that company, shown separately from any other dividend income.
The highest percentage shareholding held during the tax year.
Around 900,000 directors are thought to be affected (Source: IT Contracting, "Close company dividend reporting for directors from the 2025/26 tax year," September 2025).
What this means in practice:
The dividends your company declares must match what you report on your personal return. HMRC now has the data to cross-reference the two far more effectively than before. If your company records show a £50,000 dividend declared in February 2027 but your Self Assessment only reports £40,000 in dividend income for 2026/27, that discrepancy will be visible.
This makes accurate, timely bookkeeping essential. If you are taking interim dividends throughout the year, each one needs a dividend voucher, board minutes, and a clear entry in the accounting records. The date of each entry matters, because it determines which tax year the dividend falls into.
Worried about getting the new reporting right? The 2025/26 return is the first year these rules apply, and mistakes could trigger an HMRC enquiry. We help our clients keep clean, compliant records throughout the year. Speak to Lock & Ledger at www.lockandledger.co.uk |
Distributable Reserves: The Legal Guardrail You Cannot Ignore
Every dividend your company pays must come from distributable reserves. This is a legal requirement under the Companies Act 2006, not a suggestion.
Distributable reserves are the company's cumulative realised profits minus its cumulative realised losses since incorporation (Source: ICAEW, "Paying dividends: the essentials").
Critically, this is not the same as the cash balance in the company's bank account. A company can have cash in the bank but negative reserves (for example, due to historic losses). In that situation, it cannot legally declare a dividend.
Conversely, a company may have strong reserves on paper but very little cash, because profits have been reinvested in stock, equipment, or debtors. The company can legally declare a dividend in this scenario, but directors must also consider whether the company will remain solvent and able to pay its debts as they fall due.
The ACCA has highlighted that unlawful dividends are "not uncommon" in owner-managed companies, often because directors draw funds before accounts are prepared and then discover that a sufficient retained earnings balance does not exist (Source: ACCA Global, "Avoiding the pitfalls of unlawful dividends," May 2021).
The consequences of getting it wrong are serious:
Directors may be personally liable to repay the unlawful distribution to the company.
HMRC can reclassify the payment as a director's loan, triggering a Section 455 tax charge, or as salary, triggering PAYE and National Insurance.
The company's accounts will need to disclose the fact that unlawful dividends were paid.
Warning: Cash in the Bank Does Not Mean You Can Declare a Dividend A common and costly mistake. Your company may have £100,000 in the bank but negative retained earnings due to historic losses. In that situation, any dividend declared is unlawful. Conversely, the company may have strong reserves on paper but only £5,000 in cash. The dividend would be legal, but the directors must still consider whether the company can pay its debts as they fall due. Always check your management accounts before declaring. Source: ICAEW — Paying dividends: the essentials | ACCA — Avoiding the pitfalls of unlawful dividends |
How to avoid this:
Maintain up-to-date management accounts throughout the year. Before declaring each interim dividend, check that the company has sufficient distributable reserves at that point in time, not just at the last annual accounts date. This is where having a budget and monthly or quarterly management accounts becomes genuinely protective, not just a nice-to-have.
A 12-Month Dividend Planning Timeline for 2026/27
Here is a practical framework for planning your dividends across the year. It is not prescriptive, but it gives you a structure to work from.
April to June 2026:
Set your budget for the year. Model your expected company profits, your target salary and dividend income, and your estimated personal tax position. Check your distributable reserves. Identify whether your total income is likely to approach £100,000 and, if so, plan mitigation strategies (pension contributions, income splitting). Declare your first interim dividend if appropriate.
July 2026:
Second payment on account for 2025/26 is due on 31 July. Make sure you have cash set aside. Review your Q1 management accounts against budget. Adjust your dividend plan if actual profits are tracking differently from forecast.
October 2026:
Review your half-year management accounts. Are distributable reserves on track? Is your total income tracking towards the £100,000 threshold? If so, consider making a pension contribution or adjusting your dividend plans for the remainder of the year.
January 2027: First payment on account for 2026/27 is due on 31 January, alongside your 2025/26 balancing payment. This is often the largest single tax payment of the year. Review your year-to-date income and adjust your remaining dividends accordingly. Consider whether you need to apply to reduce your payments on account.
March 2027: Final review before the tax year ends on 5 April. Confirm your total income, check distributable reserves, and make any final dividend declarations with proper paperwork. If you have followed the plan throughout the year, this should be a calm, considered decision rather than a last-minute scramble.
Frequently Asked Questions
Can I take interim dividends every month?
Yes. There is no restriction on how frequently a company can declare interim dividends, provided it has sufficient distributable reserves at the time of each declaration.
Monthly dividends are common for owner-managed companies. However, each dividend must be supported by board minutes and a dividend voucher, and the company's books must record the payment or credit to the director's loan account at the time it is made.
How do I know if my company has enough distributable reserves?
Start with your most recent annual accounts. The retained earnings or profit and loss reserve figure on the balance sheet is your starting point. Add any profits earned since those accounts were prepared, and deduct any dividends already declared. If you are unsure, prepare interim management accounts before declaring a dividend. If your reserves are marginal, seek professional advice before proceeding.
What happens if I declare a dividend and it turns out the company did not have sufficient reserves?
The dividend is unlawful. Directors may be personally liable to repay the distribution to the company. HMRC can reclassify the payment as a director's loan or salary, creating additional tax liabilities. The ACCA has noted that this is usually treated as incompetence rather than a genuine error, with consequences to match.
Why does budgeting matter for dividend planning?
A budget gives you visibility over your company's expected profits, distributable reserves, and your personal tax position for the full year. Without one, you are making dividend decisions based on incomplete information, which increases the risk of taking unlawful dividends, breaching the personal allowance taper, or being caught off guard by payments on account.
What is the most tax-efficient salary for a director in 2026/27?
This depends on your individual circumstances, but many sole directors take a salary at or near the personal allowance level of £12,570. This uses the tax-free personal allowance and keeps the salary below the primary threshold for employee National Insurance. However, with employer NI at 15% from April 2025 and the secondary threshold reduced, the optimal level should be reviewed each year with professional advice.
Take Control of Your 2026/27 Tax Year. Start Today.
At Lock & Ledger, we work as a fractional finance director for owner-managed SMEs across Somerset and the wider UK.
We build budgets, maintain management accounts, and have the dividend planning conversation with our clients throughout the year, not just in the final weeks before April.
If any of the following apply to you, we should talk:
You do not have a budget in place for 2026/27
You are unsure whether your company has sufficient distributable reserves to support interim dividends
Your total income is approaching or exceeding £100,000 and you have not planned for the personal allowance taper
You have never accounted for payments on account in your cash flow
You are not confident your dividend paperwork would withstand an HMRC enquiry
We will review your position, identify the opportunities, and help you build a plan that works for the full year ahead.
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