Dividend Tax – What It Means for Small Business Owners and Investors
Nov 19, 2025
Nearly four million people are expected to pay dividend tax this year. That’s double the number from just a few years ago, as the tax-free allowance has been whittled down from £5,000 in 2016 to just £500 today.
For many small company directors and casual investors, this change has been a shock. What used to be a modest benefit for taking income as dividends has now turned into a sizeable tax bill. HMRC expects to collect £18.6 billion in dividend tax in 2025–26, up from £14.7 billion in 2021–22.
A Real-World Example
Take Sarah, who runs a small marketing agency. She pays herself a salary of £12,500 and takes the rest of her income as dividends. Three years ago, the first £2,000 of dividends were tax-free. That meant she could take £30,000 in dividends and only a portion would be taxed.
This year, with the allowance at £500, almost all of her dividends are now taxable. Sarah’s annual dividend tax bill has jumped by over £1,000 — without her business making a penny more in profit.
This story is playing out across the UK for directors, freelancers, and even those with modest shareholdings in FTSE 100 companies.
The Bigger Picture
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Higher rate taxpayers: Around 1.2 million are now paying an average of £6,200 a year.
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Additional rate taxpayers: 340,000 individuals will hand over an average of nearly £29,000 each.
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Basic rate taxpayers: Even those just tipping over the £500 allowance could now face the hassle of filing a tax return for the first time.
In short: more people are dragged into the system, and those at the top are paying eye-watering sums.
What Can You Do About It?
Dividend tax isn’t going away, but there are strategies to soften the blow:
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Use your ISA
Each year you can invest up to £20,000 into an ISA. All income and capital gains inside it are tax-free. This is the simplest way to shield dividends. -
Maximise pension contributions
Paying into a pension reduces your taxable income and shelters growth from dividend tax and capital gains tax. For directors, company contributions can also reduce corporation tax. -
Split income with a spouse
If your partner has unused allowances or is in a lower tax bracket, transferring shares can spread the dividend income more efficiently. -
Review your overall strategy
Don’t just default to taking large dividends. Sometimes a slightly higher salary can reduce overall tax, especially when you consider pension allowances and future planning. -
Look at alternative investments
Some investors are diversifying into growth-focused funds or assets where the emphasis is on capital gains rather than dividends — though this requires careful planning.
Final Thought
The shrinking dividend allowance is a reminder that tax rules can change quickly and often not in your favour. Business owners and investors who simply “set and forget” their strategy risk being caught out.
The good news? With proper planning, you can still keep more of what you earn. Use your ISA, use your pension, and don’t leave it until January to find out your dividend tax bill.
Most small firms aren’t short of hard work, they’re short of joined-up systems that make decisions easy when the rules shift.
That’s exactly what my Modernisation Diagnostic is built for a one-off review that looks at how your business runs, where time and money are leaking, and what to fix first.
You’ll leave with a clear action plan, not a sales pitch.
Book your Modernisation Diagnostic here: https://www.askjt.co.uk/modernisation-diagnostic
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