APRIL - ISSUE 27
GO FIGURE FINANCIAL EST. 2013
TAKING A DIVIDEND BEFORE 6 APRIL 2026
CHARGING INTEREST WHERE A DIRECTOR’S LOAN ACCOUNT IS IN CREDIT
C O N T E N T S | A P R I L 2 0 2 6 -14-13-10-09-06-16FIVE YEAR-END TAX PLANNING TIPS APR AND BPR AND THE £2.5M ALLOWANCE
SECTION 455 TAX AND THE CHANGE IN THE DIVIDEND UPPER TAX RATE
USING THE BUSINESS TO PAY SCHOOL OR UNIVERSITY FEES
As the end of the 2025/26 tax year approaches, it is a good idea to undertake a financial review and assess whether there is any action you can take to cut your tax bill
Tip 1 – Don’t waste your personal allowance
If you have not used your 2025/26 personal allowance, it will be lost – you cannot carry it forward to 2026/27 To prevent wasting it, consider whether you can advance income so that you receive it in 2025/26 rather than in 2026/27. If you are claiming capital allowances, consider tailoring your allowances so you do not waste your personal allowance If you have a family company, consider paying a dividend to mop up your dividend allowance and any unused personal allowance
If you cannot use your personal allowance and you are married or in a civil partnership and your spouse/civil partner pays tax at the basic rate, consider making a marriage allowance claim to transfer £1,260 of your allowance to them – this can cut your joint tax bill by £252
Tip 2 – Reduce your income to protect your personal allowance
Once adjusted net income reaches £100,000, your personal allowance is reduced by £1 for every £2 by which your income exceeds this level Once adjusted net income reaches £125,140, the personal allowance is lost However, consideration could be given to making pension contributions or Gift Aid donations to charity to reduce your income and claw back some or all of your personal allowance.
Tip
If you have not already invested the full £20,000 in an ISA in 2025/26, consider using the full allowance before 6 April 2026 Interest and dividends within an ISA are tax-free
From 6 April 2027, the tax rates on savings income will rise by two percentage points From the same date, under 65s will only be able to invest £12,000 of their £20,000 ISA allowance in a cash ISA
From 6 April 2026, the dividend ordinary rate (which applies to dividends falling in the basic rate band) and the dividend upper rate (which applies to dividends falling in the higher rate band) increase by two percentage points. The dividend ordinary rate rises from 8 75% to 10 75% and the dividend upper rate rises from 33 75% to 35 75% There is no change in the dividend additional rate which remains at 39.35%.
If you have a personal or family company which has retained profits, consider paying a dividend before 6 April 2026 to beat the dividend tax rises.
Tax-relieved contributions can be made to a registered pension scheme up to 100% of earnings (or £3,600 if lower) subject to having sufficient available annual allowance The annual allowance is set at £60,000 for 2025/26 However, where threshold income exceeds £200,000 and adjusted net income exceeds £260,000, it is reduced by £1 for every £2 by which adjusted net income is more than £260,000 until the allowance is reduced to £10,000 Unused allowances can be carried forward for up to three years Any allowance from 2022/23 will be lost if not used by 5 April 2026; however, you must use up all your 2025/26 allowance before using allowances from earlier years
Once a pension has been flexibly accessed, the annual allowance is reduced to £10,000.
As the tax year draws to a close, directors of personal and family companies should consider whether it is worthwhile paying a dividend before 6 April 2026. However, it is only possible to pay a dividend where the company has sufficient retained profits from which to pay it Also, where a class of share has more than one shareholder, dividends must be paid in proportion to shareholdings
Where a shareholder has not used their dividend allowance (set at £500 for 2025/26) or their personal allowance in full, consideration should be given to paying a dividend before the end of the tax year to mop up unused dividend and personal allowances. This allows profits to be extracted from the company without an additional tax liability Where the company has an alphabet share structure, dividends can be tailored to the shareholder’s circumstances
In personal and family companies, director shareholders often borrow money from the company Where a company is close, as most personal and family companies are, if a loan to a director or other participator remains outstanding on the corporation tax due date for the period in which the loan was taken out, the company must pay tax on the outstanding amount of the loan Corporation tax is due nine months and one day from the end of the accounting period
The tax that is due on the outstanding loan balance is known as section 455 tax While it is payable with the corporation tax for the period, it is not corporation tax Unlike most taxes, it is a temporary tax as it is repayable nine months and one day after the end of the period in which the loan is repaid
The rate of section 455 tax is linked to the dividend upper rate This is set at 33 75% for 2025/26 and will rise to 35 75% for 2026/27
Where a director is thinking of taking a loan from a company and is unlikely to repay it within nine months of the company year end, taking the loan in 2025/26 rather than in 2026/27 will reduce the section 455 tax paid by the company on the outstanding loan by 2%
As the rate of section 455 tax paid on a loan depends on the dividend upper rate at the time the loan is made, when clearing loans, it makes sense to clear those that will generate the highest repayment first (i.e. those on which the rate of section 455 tax is the highest).
Example
A Ltd is Andrew’s personal company. The company prepares accounts to 30 June each year. Andrew, the sole director shareholder is planning on taking a £30,000 loan from the company in April 2026. He is planning on repaying it in 2028 when a savings policy matures. The loan will remain outstanding on 1 April 2027 when the corporation tax for the period is due.
If Andrew takes the loan on 30 April 2026 as planned, the company will need to pay section 455 tax of £10,725 (£30,000 @ 35 75%) on 1 April 2027 However, if instead Andrew takes the loan a month earlier on 31 March 2026, the company’s section 455 tax bill will be £10,125 (£30,000 @ 33 75%) Taking the loan before 6 April 2026 saves the company £600 in tax
For owner-managed businesses, paying school or university fees through the company can appear attractive, especially if the company has surplus cash However, tax consequences may arise for the individual.
Should the company reimburse the individual, the amount counts as earnings subject to PAYE income tax as well as employee and employer Class 1 NIC. Therefore, reimbursement is generally the least efficient method of funding.
Where a company pays for a course undertaken by an employee or director, the expense is only tax deductible if it is incurred ‘wholly and exclusively’ for business purposes. Direct payments to an educational establishment will generally fail this business purpose requirement and are therefore not tax deductible
The most straightforward method is for the company to contract directly with the school or university The employee will be charged a benefit in kind (BIK) on the payment made, the company pays tax Class 1A NIC, but no employee NIC arises As Class 1A NIC is corporation tax deductible, this route is typically marginally more efficient than paying additional salary For higher rate taxpayers, the corporation tax deduction rarely offsets the combined income tax and NIC exposure for the employee
The loan alternative
An employer may lend funds to an employee to cover tuition fees A formal loan agreement should be drawn up, including interest and repayment terms
Provided the total outstanding loans do not exceed £10,000 at any point in the tax year, no taxable benefit arises on an interest-free or low-interest beneficial loan. The employee’s only cost is any interest charged under the agreement. If the loan exceeds £10,000, a taxable benefit arises based on the difference between the interest charged and HMRC’s official rate (currently 3.75%) The rate can change year on year.
Value of this approach
This approach does not eliminate tax but alters the timing of the tax payment. If the loan is later released or written off, the amount is treated as earnings subject to income tax and Class 1 NIC The NIC is collected through PAYE, however the income tax is reported on the employee’s Form P11D The employee is then required to file a Self-Assessment tax return
Dividend planning and the settlements constraint
A child can own shares at any age (although dividends are typically held in a bare trust until the child reaches 18 years), therefore another possible route that avoids employment income is through share ownership However, the settlements legislation remains the principal obstacle If a parent provides shares or funds to their child and the income from those investments exceeds £100 per year, the income is taxed as if it were the parent's Therefore, to have dividends taxed on the child, funds need to be provided by someone other than a parent (e g a grandparent)