The April 2026 tax change increases the cost of extracting profits from owner managed businesses. While individual changes are incremental, their combined effect becomes more significant over time, particularly where profits fall within the marginal relief band.
Why this matters for owner managed businesses
Many owner managed businesses still rely on remuneration structures that were designed when allowances were higher and thresholds moved more regularly. With income tax thresholds frozen and dividend tax rates increasing, strategies that were previously efficient can now result in higher tax leakage year after year if left unchanged.
This is less about reacting to a single tax change and more about recognising that the underlying tax environment has shifted. Corporation Tax rates, marginal relief bands, and personal tax thresholds all interact to create different optimal extraction points depending on profit levels.
What you need to know or consider
Corporation Tax rates and marginal relief: Companies with profits between £50k and £250k face effective tax rates of around 26.5% due to marginal relief. This makes the timing and structure of profit extraction particularly important for businesses in this band.
Dividend tax increases: From April 2026, dividend tax rates increased to 10.75% (basic rate) and 35.75% (higher rate). Combined with the £500 dividend allowance, this means most dividend income is now fully taxable.
Frozen thresholds: Income tax thresholds remain frozen until 2031, gradually pulling more income into higher tax bands as profits grow. This fiscal drag compounds year after year.
Salary and dividend balance: Traditional salary and dividend mixes may no longer be optimal once employer National Insurance costs are factored in. The Employment Allowance of £10,500 can partially offset this, where eligibility conditions are met.
Employer pension contributions: These can reduce corporation tax exposure while remaining highly tax efficient personally. They avoid both Income Tax and National Insurance, making them particularly valuable for higher earners and businesses within the marginal relief band.
Directors’ loan accounts: The s455 charge increased to 35.75% from April 2026. Overdrawn loan accounts must be cleared within 9 months of the year end to avoid this temporary corporation tax charge.
We are already factoring these changes into remuneration planning for owner managed businesses. Where profits have changed, entry into the marginal relief band has occurred, or personal circumstances have shifted, a tailored review becomes particularly important.
