Most SME owners see their business as a vehicle for their lifestyle. But there is a quiet, technical tug-of-war happening behind the scenes between your bank account, your tax return, and HMRC.
Historically, the “Standard Advice” was simple: pay yourself a tiny salary and take the rest in dividends. But as we look toward April 2026, that advice is becoming a lot more complex.
The April 2026 Shift
From April 2026, we are seeing the impact of the dividend tax hikes across the basic (10.75%) and higher (35.75%) rates. While the £500 dividend allowance remains a small relief, the “gap” between the cost of a salary and the cost of dividends is narrowing.
Is the low-salary/high-dividend model still beneficial? In short: Yes, but the margin of gain is shrinking. If you’re a higher-rate taxpayer, the tax saving is still there, but it’s no longer the incentive it was five years ago.
The danger of distributable reserve constraints:
This is where the stress usually starts. To pay a dividend, your business must have retained profits.
We often see founders who see a healthy bank balance and assume they can “just take a dividend.” But if your P&L doesn’t show enough post-tax profit to cover that payment, you aren’t taking a dividend, you’re accidentally creating a Director’s Loan.
This triggers two specific problems:
- S455 Tax: If that loan isn’t repaid within 9 months of your year-end, your company owes HMRC a 35.75% tax charge. It is a massive, albeit temporary, cash-flow drain.
- Benefit in Kind: If the loan exceeds £10,000, you’ll also be personally taxed on the “benefit” of that interest-free money.
Efficiency vs. Peace of Mind
At Dash, we often have the “Salary vs. Dividend” conversation not just based on tax codes, but on mental bandwidth.
- The Dividend Route: Maximum tax efficiency, but requires disciplined bookkeeping, a solid understanding of your profit reserves, and the patience to wait for year-end reconciliations.
- The PAYE Route: Much simpler to understand. You pay more in National Insurance, but the money is yours the moment it hits your account. No S455 risks, no messy loan accounts, and it’s often much simpler for mortgage applications.
Conclusion
Effective remuneration planning is an iterative process, not a one-time setup. It requires consistent oversight to ensure compliance with shifting tax legislation and liquidity requirements.
If you find yourself constantly worrying whether you “can afford” to pay yourself, or if you’re staring at an overdrawn Director’s Loan account with a sense of dread, the tax savings might not be worth the stress.
Written by Danielle Biggins & Shannon McDonald
