6 Mins
Dividends
As the 2025/26 tax year progresses, understanding the dividend rules in the UK for 2025/26 is increasingly important for company directors and shareholders to remain fully informed about the legal and tax implications surrounding the declaration of dividends and the use of dividend waivers.
Issuing Dividends
Dividends represent distributions of a company’s post-tax profits to its shareholders. Entitlement to dividends is typically defined in the company’s Articles of Association and may vary depending on the class of shares held.
Before declaring a dividend, directors must ensure that the company has sufficient distributable profits, as required under the Companies Act 2006. These profits must be evidenced by reliable financial statements – either the latest annual accounts or up-to-date interim management accounts. These accounts must clearly reflect the company’s assets, liabilities, share capital, and any provisions for future obligations, such as corporation tax. If a dividend is paid in excess of available profits or from capital, it is deemed illegal. Directors authorising such payments may be in breach of their statutory duties and could be personally liable to repay the amount that caused the loss to the company.
Each time a dividend is declared, whether interim or final, a board minute must be prepared, confirming the availability of distributable reserves and recording the shareholders’ entitlement. This minute should be signed and dated. Additionally, a dividend voucher (or counterfoil) should be issued for each payment. While not a legal requirement, it is essential for tax reporting and should be retained for personal tax return preparation.
Dividend Waivers
In close companies, it is not uncommon for some shareholders to waive their right to receive a dividend. However, such waivers must be handled with care to avoid falling foul of HMRC’s anti-avoidance rules. This waiver must be completed before the dividend is declared or paid. HMRC has previously scrutinised arrangements where waivers were not properly documented, particularly where the waiver appeared to facilitate tax advantages for other shareholders. To minimise the risk of challenge, the waiver must be executed by deed, signed, dated, and witnessed, and retained with the company’s statutory books.
It is essential that the waiver is in place before the shareholder becomes entitled to the dividend. For interim dividends, this means the waiver must be executed before payment is made. For final dividends, which become payable once approved at a board meeting, the waiver must be in place before that approval unless the dividend is expressly stated to be payable at a future date.
When preparing a waiver, directors must ensure that the company has sufficient retained profits to pay the same rate of dividend on all issued share capital, even if some shareholders have waived their entitlement. Furthermore, the waiver must serve a genuine commercial purpose, such as retaining profits within the business for future investment or expansion.
This area continues to attract attention from HMRC, particularly where documentation is lacking or where waivers appear to be used to reallocate income between connected persons. In such cases, HMRC may disregard the waiver, reclassify the dividend as remuneration, or reallocate the dividend among all shareholders, potentially resulting in unexpected tax liabilities.
VAT Reclaim on Pension Costs – HMRC Change of Interpretation
From 18 June 2025, HMRC now allow full VAT recovery on all employee pension scheme management costs, which now includes pension investment management fees.
Previously, only administrative fees were fully reclaimable under the normal rules of VAT attribution, with VAT incurred on investment management fees being wholly irrecoverable. Now, employers can fully reclaim VAT on both administrative and investment services, subject to the normal rules of VAT recovery.
If you have not done so already, you should now review the VAT treatment of pension costs incurred over the last four years. It may be possible to reclaim the VAT applicable to the investment portion of the fees via a retrospective claim.
If you would like to discuss this further based on your specific circumstances, please contact Adam Thomson or Alan Davis from the Henderson Loggie VAT Team.
Making Tax Digital – corporation tax
It has recently been announced that Making Tax Digital for corporation tax will not be introduced. Instead, HMRC have announced that they will modernise services and will start with renewing internal systems to provide a foundation for future improvements. HMRC have also stated they recognise that corporation tax encompasses a wide range of industries and is seeking to work with stakeholders to identify the key changes and have indicated they are committed consulting, which will be a welcome forum for firms and businesses to help shape any future design and timing of changes.
Business Property Relief
Last year’s Autumn Budget introduced some major changes to the tax reliefs available to business owners.
One of the most impactful changes announced was the reforms to Business Property Relief: BPR has long been a valuable relief from Inheritance Tax (IHT), allowing qualifying business assets to be passed on free of tax or at a reduced rate. Typically, shares in unquoted trading companies, business interests, and certain business assets can qualify for up to 100% relief from IHT, provided certain conditions are met.
From 6 April 2026, instead of qualifying assets receiving 100% relief, only the first £1 million of qualifying assets will be eligible for full relief with the remainder receiving relief at 50%.
Each individual will receive this £1 million allowance, however if this is not used by the individual it will not pass to the surviving spouse.
The changes to BPR will have a major impact on the IHT of individuals who hold shares in a trading company.
However, there are many planning options available to reduce the IHT liability. A few examples of planning that could be consider are:
- Gifting to spouse – transfers between married couples take place at no gain/no loss and as each individual receives the £1 million allowance, it may be beneficial for some BPR qualifying assets to be transferred to a spouse if they do not already hold some.
- Update Wills – to fully utilise the available relief, married couples could consider updating their Wills so that £1 million of qualifying assets passes to family with the remainder being left to the surviving spouse.
- Consider gifts in lifetime – gifts can be made directly to individuals or to trusts to reduce the value of estate for IHT. A gift to trust can be especially beneficial as they have their own £1 million BPR allowance if certain conditions are satisfied, increasing the total amount of BPR available.
If you would like to discuss any planning opportunities, please do not hesitate to get in touch.