Changes to dividend tax rates for the 2026/27 tax year are set to have a direct impact on small and medium-sized enterprise (SME) owners across the UK. With a proposed 2 percentage point increase in both the basic and higher rate bands, now is the time to review how you extract profits from your business.

At MCC Accountants, we work closely with directors and shareholders to ensure tax-efficient strategies remain aligned with changing legislation. Here’s what you need to know—and how to prepare.

What Are the New Dividend Tax Rates for 2026/27?

From April 2026, dividend tax rates are expected to increase as follows:

  • Basic rate: rising from 8.75% → 10.75%
  • Higher rate: rising from 33.75% → 35.75%
  • Additional rate: rising from 39.35% → 41.35%

📌 While the dividend allowance remains relatively low, these increases mean shareholders will pay more tax on profits taken as dividends.

Why This Matters for SME Owners

For many SME directors, dividends are a key method of extracting profits in a tax-efficient way. However, with rising rates and reduced allowances in recent years, the gap between salary and dividend taxation is narrowing.

Key implications include:

  • Higher personal tax bills on dividend income
  • Reduced overall tax efficiency of dividend strategies
  • Greater need for proactive tax planning

This is particularly relevant for owner-managed businesses where remuneration is structured around a low salary + dividends approach.

The Bigger Picture: Increasing Tax Pressure on Business Owners

The dividend tax rise is part of a broader trend of tightening tax rules affecting SMEs, including:

  • Reduced dividend allowances in recent years
  • Rising Corporation Tax (up to 25% for many businesses)
  • Increased scrutiny on profit extraction strategies

Together, these changes mean that traditional approaches may no longer be the most efficient.

What Should SME Directors Do Now?

Rather than reacting after the changes take effect, business owners should start planning early.

1. Review Your Remuneration Strategy

Assess the balance between salary, dividends, and other income streams. In some cases, increasing salary (despite NIC implications) may become more viable.

2. Consider Timing of Dividends

Bringing forward dividend payments into the 2025/26 tax year could help you benefit from lower current rates.

3. Maximise Use of Allowances

Ensure you are fully utilising:

  • Dividend allowance
  • Personal allowance
  • ISA allowance (for tax-free investment income)

4. Explore Alternative Structures

For some businesses, restructuring may improve tax efficiency, such as:

  • Operating through a limited company vs sole trader
  • Using family shareholding structures
  • Retaining profits within the business for reinvestment

5. Plan for Cash Flow Impact

Higher dividend tax means less take-home income. Planning ahead ensures you’re not caught out by larger tax liabilities.

Dividend vs Salary: Is the Strategy Still Worth It?

Despite the increase, dividends will likely remain more tax-efficient than salary in many cases—but the margin is shrinking.

The key is no longer just choosing dividends—it’s about:

👉 Finding the optimal mix based on your individual circumstances

This is where tailored advice becomes essential.

How This Links to Wider Financial Planning

With dividend taxation becoming less favourable, SME owners should think more holistically about wealth planning, including:

  • Pension contributions (tax-efficient and long-term focused)
  • ISAs for tax-free investment growth
  • Business reinvestment strategies
  • Exit planning and capital gains considerations

Final Thoughts: Plan Early, Stay Efficient

The upcoming dividend tax increase for 2026/27 is another reminder that the tax landscape for SME owners is evolving.

If you rely on dividends as a primary income source, taking action now can help you:

  • Reduce future tax liabilities
  • Optimise profit extraction
  • Protect your long-term financial position

Need Expert Guidance?

At MCC Accountants, we specialise in helping SME owners navigate tax changes and build efficient, forward-thinking financial strategies.

👉 Get in touch today to review your dividend strategy ahead of the 2026/27 tax changes and ensure your business remains tax-efficient.