Dividend difficulties for business owners in 2025

Following the spending review last week, various reports have suggested that the Chancellor is considering reforms to the dividend allowance and tax rates in the Autumn Budget later this year. Rachel Reeves is allegedly considering removing the current £500 dividend allowance and increasing the top income tax rate for dividends from the current rate of 39.35% to potentially 45%, in line with the top rate of tax in England, Wales and Northern Ireland for other types of income.

Any change to tax on dividends would come alongside reforms to the rules for the disclosure of dividends received by the owners of businesses, who will be required to disclose dividends from their own business separately on their self-assessment tax return from the 2025/26 tax year.

This has led to concerns amongst business owners that HMRC intends to look more closely at the way shareholders remunerate themselves. For example, family-owned companies that pay different dividends to different shareholders through the use of ‘alphabet shares’ could come under scrutiny and challenge following the change.

Alphabet shares is the terminology used for a situation where there are multiple classes of shares in a company as this can allow for future flexibility in how dividends are paid out. For example, dividends might be paid on ordinary A shares, but not on ordinary B and ordinary C shares in a company.

Business owners may already feel they are under the tax spotlight due to the reforms the Chancellor made in the Autumn Budget to business asset disposal relief from capital gains tax (formerly known as entrepreneurs’ relief), business property relief (the relief from inheritance tax for business owners), National Minimum Wage increases and increases to employers’ National Insurance contributions. All of this has resulted in some business owners feeling the pinch and perhaps believing that a more significant proportion of the tax burden has fallen on them.

Changes to the way dividends are taxed and disclosed to HMRC are likely to have a significant impact on the behaviour of shareholders. If the dividend allowance is withdrawn and the highest tax rate on dividends is increased to 45%, the effective tax rate payable by a shareholder extracting a dividend from their personal or family company could be as high as 59%.

This is because there is a double layer of tax, as corporation tax is first payable on any company profits before they are withdrawn. Therefore, with an additional tax burden and potential additional HMRC scrutiny on the level of dividend payments, it is likely that many business owners could reduce or cease dividend payments from their own companies altogether.

In contrast, they may choose to withdraw cash using salary or bonus payments, or some may consider conducting operations via a sole trade, partnership or LLP instead. All of this needs to be factored into the Chancellor’s calculations when assessing the impact of measures in the autumn and will continue to give business owners plenty to think about as they evaluate their future plans.