Muras Matters: Increase in Tax on Dividends and Directors’ Loans

Background

As part of the Budget in November 2025, the Chancellor, Rachel Reeves, announced that both the basic rate and higher rate of tax on dividends would increase by 2%. That increase has now taken effect from 6 April 2026, the start of the new tax year for 2026/27, and owner-managed businesses in particular may need to factor this tax increase into any dividend payment decision they make going forward.

The increase in the dividend tax rate will also see a rise of 2% in the tax charge on directors’ loans made to participators by close companies for loans made on or after 6 April 2026.

Detail

From 6 April 2026, the basic and higher rates of income tax on dividends will increase by 2%. The additional rate will remain unchanged. These changes are summarised below.

The tax-free dividend allowance remains unchanged at £500. Therefore, basic and higher rate taxpayers with dividends in excess of this amount will see an increase in their dividend tax for the 2026/27 tax year.

For owner-managed companies, in many cases, an individual employee shareholder may take a ‘reasonable’ salary, leaving the balance of their ‘drawings’ to be taken either as a bonus or a dividend payment.  Following the change to rates of corporation tax in 2023, the benefit of taking a dividend over a bonus became much less apparent, and now that the increase in the rates of dividend tax have come into effect, this is likely to complicate this decision further.  It will therefore be necessary to look at each decision on a case by case basis, and if you have any questions regarding whether a bonus or dividend represents the most tax efficient profit extraction please speak to your usual contact at the firm.

The tax charge on directors’ loans made to participators by close companies will also increase by 2% from 33.75% to 35.75%, reflecting the increase in the dividend tax for higher rate taxpayers,  for loans made on or after 6 April 2026 under the section 455 rules. This change will be particularly relevant for owner managed businesses where directors regularly use their loan accounts to manage cash flow. The rules apply where a director is a participator, meaning broadly a shareholder, and the company is classed as a close company, typically one controlled by five or fewer shareholders.

In addition to the increase in the tax rate on directors’ loan accounts, there are proposals being considered by HM Revenue & Customs (HMRC) to significantly increase the reporting requirements on director’s loan accounts and participator loans to connected companies as part of the government’s wider anti tax avoidance strategy. We will look at these proposals being considered by HMRC in a future Muras Matters.

If you would like to discuss how any of these changes may affect you please contact our Tax Director, Jenny Marks.

To see our other news items please visit our Muras Baker Jones – Blog.