As a small business owner, ensuring you structure your income efficiently can make a significant difference in how much you take home after tax. The tax landscape for 2025/26 presents both opportunities and challenges, so understanding the key thresholds and tax rates is crucial for financial planning.
The way you receive income, whether as a salary, dividends, or a mix of both, determines how much tax you pay.
Quick Takeaways for Small Business Owners in 2025/26:
✔ Personal Allowance reduces after £100k, leading to a 60% tax trap.
✔ Pension contributions can be restricted above £200k.
✔ Child tax credits decrease for earnings over £60k.
✔ A mix of salary & dividends can reduce your tax bill.
Overview of Key Tax Thresholder 2025/26
Below is an overview of the key tax thresholds for the 2025/26 tax year as shown in our graph below:
Income Tax Bands for 2025/26:
- Personal Allowance: £0 – £12,570 (0% tax)
- Basic Rate: £12,570 – £50,270 (20% tax)
- Higher Rate: £50,271 – £125,140 (40% tax)
- Additional Rate: Above £125,140 (45% tax)
Dividend Tax Rates for 2025/26:
- Up to £500: 0%
- Basic Rate: 8.75%
- Higher Rate: 33.75%
- Additional Rate: 39.35%
Key Remuneration Planning Considerations
- The Personal Allowance Danger Zone (£100k – £125k) – Earning over £100,000 results in the gradual reduction of your personal allowance by £1 for every £2 earned above this threshold, effectively creating a 60% tax rate on this portion of income.
Planning Tip: Consider pension contributions or charitable donations to reduce your taxable income below this threshold. - The Pension Warning Zone (£200k+) – If your total income, including pension contributions, exceeds £200,000, your annual pension allowance could be tapered, reducing tax-efficient pension savings.
Planning Tip: Monitor pension contributions and seek advice to avoid unexpected tax charges. - The Parent Warning Zone (£60k – £80k) – If you or your partner earn over £60,000, child tax credits are reduced at a rate of 1% for every £200 earned above this level. If your income exceeds £80,000, you’ll lose them completely.
Planning Tip: Consider structuring income between spouses to stay below the threshold and retain tax benefits.
The Best Remuneration Strategy for Small Business Owners in 2025/26
For limited company owners, choosing a tax-efficient pay structure (by balancing salary and dividends) can significantly impact the tax you pay. While salary attracts income tax and National Insurance, dividends are taxed at a lower rate but are subject to corporation tax before distribution.
Optimising your remuneration requires balancing tax efficiency with pension planning, allowances, and benefits. If you’re unsure whether you’re paying more tax than necessary, now is the time to review your strategy.
Take Action Today
Are you paying more tax than necessary?
Our SBCA team can help you optimise your salary and dividends for 2025/26.
Get in touch today to review your small business tax planning strategy and ensure you’re making the most of the available allowances and tax-efficient income structures.
Call us on 01772 204102 or email prosper@sbca.co.uk to book a consultation!
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