Dividend taxation has, for most of the past four years, been changing in ways that rarely produced headlines but have cumulatively reshaped the cash position of every UK director-shareholder. No single Budget delivered a dramatic dividend rate cut or rise that became a political event. Instead, a series of smaller changes — the 1.25 percentage point levy increase in April 2022, the additional rate threshold drop in April 2023, the dividend allowance cuts in 2023 and 2024 — combined to produce a meaningful tightening that has now bedded in.
This is the story of dividend tax from April 2022 to April 2026, told through the planning conversations we have been having with our owner-managed business client base.
The April 2022 rate rise
The dividend tax rates rose by 1.25 percentage points across all three bands from 6 April 2022 to fund the Health and Social Care Levy. The basic rate rose from 7.5% to 8.75%, the upper rate from 32.5% to 33.75%, and the additional rate from 38.1% to 39.35%. When the underlying Health and Social Care Levy was scrapped in the Mini-Budget of September 2022, the 1.25 percentage point dividend uplift was retained. The April 2022 rates therefore became, and remain, the permanent dividend tax rate structure.
For a director-shareholder drawing £75,000 of dividends in the basic and upper rate bands, the cash impact of the 1.25 percentage point uplift was on the order of £700 per year on a permanent basis. The change was small enough that it produced no immediate behavioural shift but large enough that it compounded over the years that followed.
The April 2023 additional rate threshold drop
The lowering of the additional rate threshold from £150,000 to £125,140 from 6 April 2023 brought several hundred thousand additional taxpayers into the dividend additional rate band. For a director drawing £160,000 in dividends, the move shifted approximately £25,000 of dividend income from the 33.75% upper rate band into the 39.35% additional rate band, producing an additional charge of around £1,400 per year on a permanent basis.
The change was the single most significant dividend tax movement of the period in cash terms for higher-drawing directors, and it has continued to compound every year since. The £125,140 threshold remains in force and has not been adjusted in the years since.
The dividend allowance cuts
The dividend allowance — the band of dividend income on which no dividend tax is charged — was £2,000 in 2022-23. It was cut to £1,000 from 6 April 2023 and to £500 from 6 April 2024. The £500 figure has remained unchanged since.
For a director drawing modest dividends — say £20,000 to £30,000 per year — the cumulative impact of the allowance cuts has been to remove almost the entire planning value of the allowance. The shelter from £2,000 of dividend tax at the basic rate of 8.75% was £175 per year, falling to £43.75 per year by 2024-25. The allowance has, for most practical purposes, become rounding rather than a planning tool.
The optimum salary point
The classic owner-managed company remuneration model — paying a director's salary up to a chosen threshold and drawing the remainder as dividends — has had to adapt to the changing rate structure and allowance landscape. The dominant question in our annual director remuneration reviews has remained the same — what is the most tax-efficient mix of salary and dividend — but the answer has shifted year-on-year as the underlying rates and thresholds moved.
The April 2022 alignment of the National Insurance primary threshold with the personal allowance at £12,570 nudged the optimum salary higher. The April 2024 NIC cut to 8% (and the April 2024 Class 4 cut to 6% for the self-employed) shifted it again. The April 2025 employer NIC rise to 15% with the £5,000 secondary threshold drop changed the employer-side calculation. The interaction with the £100,000 cliff and the personal allowance taper remained the dominant constraint for higher-drawing directors throughout.
Our tax planning team has rebuilt director remuneration models annually across the period and produced individual recommendations for every owner-managed business client. The optimum salary point in 2025-26 sits some hundreds of pounds different from the equivalent figure in 2022-23.
The compounding effect on family companies
For family companies where dividends are paid across multiple family-member shareholders, the cumulative impact of the dividend changes has been compounded across each shareholder. Spouses with their own personal allowance and basic rate band remain a legitimate route for tax-efficient profit extraction, but the value of each spouse's £500 dividend allowance is small. The Section 624 settlements anti-avoidance rules continue to constrain dividend planning to genuinely independent shareholdings.
For adult children of family business owners, dividend planning continues to interact with the children's own income from employment and the high-income child benefit charge where the children themselves have qualifying children. Our self assessment team builds family company dividend modelling into every relevant personal tax engagement.
Retention versus extraction
The cumulative tightening of dividend taxation across the period has shifted the calculation between retaining profit in the company and extracting it as dividends. For owner-managers without immediate cash need, retaining profit and benefiting from the 25% main rate (or marginal relief band) compares against the cumulative dividend tax rates of 8.75%/33.75%/39.35% when extracted later. The corporation tax rise to 25% from April 2023 reduced the after-CT cash available for dividend extraction, but the dividend rates themselves have not risen meaningfully since April 2022.
The most powerful planning lever to emerge across the period has been employer pension contributions. An uncapped employer contribution into a director's pension reduces corporation tax at the marginal rate (potentially 26.5% in the marginal band) and produces no immediate income tax or NIC charge for the director, although the pension fund is then subject to the IHT regime applying from April 2027.
What we tell clients
The dividend planning conversation has become less about chasing single allowances and more about modelling the multi-year cumulative impact of the entire structure. For most director-shareholders, the answer is no longer a single optimal extraction figure but a sequence of decisions across multiple years that takes account of CT rates, dividend rates, pension limits, personal allowance abatement, and the changing thresholds.
If you would like a multi-year director remuneration review, contact our team.