Dividend Extraction Strategy for Owner-Managed Companies UK

2. Ensuring Retained Profits Exist

A core requirement for any dividend extraction strategy for owner-managed companies is that the company must have enough retained profits (after corporation tax) before a dividend can be declared.

If your company has exhausted all retained profits, paying a dividend risks being illegal (or treated as a salary/bonus by HM Revenue & Customs).

For example: even if the company expects a loss for the coming year, if there were existing retained profits at the start of the period you may still have headroom to pay a dividend, subject to the retained profit level being sufficient.

3. Determining the Tax‐Efficient Balance of Salary vs Dividends

In a dividend extraction strategy for owner-managed companies, you’ll typically pay yourself a modest salary (to capture pension/NI benefits) and then extract further funds as dividends.

The benefit: dividends are not subject to employee National Insurance, and are taxed at favourable rates compared to salary.

For the 2025/26 tax year:

• The dividend allowance (tax-free dividend income) remains at £500.

• Dividend tax rates (on dividend income above the allowance, and once your Personal Allowance is used) are:

  • Basic-rate taxpayers – 8.75%

  • Higher‐rate taxpayers – 33.75%

  • Additional‐rate taxpayers – 39.35%

• The personal allowance remains £12,570.

So a strategy needs to consider how much salary you take, how that uses up your Personal Allowance / NI thresholds, and then how much dividend you can take under the retained profit available and the dividend tax bands.

4. Timing and Planning Ahead

To execute a dividend extraction strategy for owner-managed companies effectively, timing is important. Key planning steps include:

• Monitor your retained profits now (and cash availability) to ensure a dividend is safe to declare.

• Consider paying a dividend while retained profits exist, rather than waiting until the last moment when profits might be depleted.

• Review the company’s projected performance: if you foresee a loss, you may want to extract profits earlier rather than risk losing the opportunity.

• Document board minutes, management accounts and a dividend resolution to show proper procedure (in case HM RC challenge the payment).

5. Watch Out for Rule Changes in 2025/26

Whilst many rules remain unchanged, the 2025/26 year presents a few notable points within a dividend extraction strategy for owner-managed companies:

• The dividend allowance remains at £500 for 2025/26 – unchanged since the previous year.

• The dividend tax rates (8.75%, 33.75%, 39.35%) remain unchanged for 2025/26.

• The Personal Allowance is still frozen at £12,570.

• The thresholds for the tax bands are also largely frozen, which means inflation risk (fiscal drag) continues to affect effective tax rates.

Because of these frozen thresholds and allowances, ensuring your dividend extraction strategy for owner-managed companies remains efficient requires up-to-date modelling each year.

6. Mistakes to Avoid

When implementing a dividend extraction strategy for owner-managed companies, be careful to avoid:

• Paying dividends without available retained profits — this can result in the dividend being re-classified and taxed as salary.

• Ignoring cash flow: even if retained profits exist on paper, you must ensure the company has the cash to pay the dividend.

• Taking so large a dividend that it pushes you into a higher tax band without planning.

• Failing to maintain documentation (board resolution, accounts verifying retained profit) — this may weaken your position if HMRC questions the dividend.

• Forgetting that dividends still count toward your overall taxable income band, so other income sources matter.

​7. How Trueman Brown Can Help You With A Dividend Extraction Strategy

If you are looking to implement a robust dividend extraction strategy for owner-managed companies, our team of experienced accountants based near South Ockendon can guide you. We can assist with:

• Reviewing your company’s retained profit position and cash flow to determine safe dividend levels

• Modelling salary/dividend mixes to optimise tax in 2025/26 and beyond

• Preparing the necessary board minutes, resolutions and management accounts to support the dividend payment

• Advising on long-term planning, including income tax band management and shareholder strategies

Feel free to contact us at mark@truemanbrown.co.uk or call us on 01708 397262 to discuss how we can support your business and help you implement a sound dividend extraction strategy for owner-managed companies.

FAQ About A Dividend Extraction Strategy

Q: What is the dividend allowance for tax year 2025/26?
A: The dividend allowance remains at £500 for 2025/26.

Q: What tax rates apply to dividends above the allowance in 2025/26?
A: The rates are: 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate).

Q: Can I pay a dividend if my company made a loss this year?
A: Yes — but only if there were retained profits at the start of the year (or earlier) sufficient to cover the dividend after taking into account the loss. If the retained profits are exhausted, you cannot legally pay a dividend.

Q: Will dividends attract National Insurance contributions?
A: No. Dividends are not subject to employee or employer National Insurance contributions, which is one of the advantages of a dividend extraction strategy for owner-managed companies.

Q: What records should I keep to support the dividend payment?
A: You should keep board minutes or resolutions authorising the dividend, management accounts showing retained profits at the time, and ensure the company has the cash to pay. This helps if HMRC ever enquires.

Q: If I take a salary plus dividends, how do I decide the right mix?
A: It depends on your personal tax situation, NI exposure, pension/benefit entitlements and company profit/cash position. It’s best to model different scenarios — for example, a modest salary up to personal allowance plus basic NI threshold, then dividends up to the basic rate band — as part of your wider dividend extraction strategy for owner-managed companies.

If you’d like us to review your company and propose a tailored dividend extraction strategy for owner-managed companies for 2025/26 and beyond, just drop us a line at mark@truemanbrown.co.uk or call 01708 397262 and we’ll be pleased to help.