Property companies and the effect of rise in dividend tax rates

Corporate landlords will not be hit by the property tax rises that will apply to unincorporated landlords from 6 April 2027; they will continue to pay corporation tax on their rental profits, the rates of which are unchanged. However, this does not mean that their shareholders are immune from the Budget tax rises. Where profits are extracted from a property company in the form of dividends, the recipient shareholders will be affected by the increases in the dividend tax rates applying from 6 April 2026.

Profit extraction

Although the profits of a property company are liable to corporation tax, the rates of which are lower than the income tax rates and the new property tax rates applying from 6 April 2027, if the shareholders want to use those profits personally, they will need to extract them. There are various ways in which this can be done, but a popular strategy where the personal allowance is available is to pay a salary equal to the personal allowance and to extract further profits as dividends.

All taxpayers have a dividend allowance, which is to remain at its current level of £500 for 2026/27. Dividends sheltered by the dividend allowance are taxed at 0%, although it should be remembered that the allowance uses up part of the tax band in which it falls.

Thereafter, dividends, which are treated as the top slice of income, are taxed at the dividend ordinary rate where they fall within the basic rate band, at the dividend upper rate where they fall within the higher rate band and at the dividend additional rate where they fall in the additional rate band.

Currently, the ordinary rate is 8.75%, the upper rate is 33.75% and the additional rate is 39.35%. From 6 April 2026, the ordinary rate rises to 10.75% and the upper rate to 35.75%. There is no change in the dividend additional rate which remains at 39.35%l

The rise will mean that basic and higher rate taxpayers will pay an extra £20 in tax on each £1,000 of dividends that they receive. A shareholder taking £50,000 in dividends will pay an additional £1,000 in tax.

Beating the rise

Where a property company has retained profits, consideration could be given to paying a dividend before 6 April 2026 where this will mean that the tax payable on that dividend will be at a lower rate than if the dividend is paid on or after 6 April 2026.

Going forward, where the company has several shareholders and an alphabet share structure is in place, the overall tax hit on profits extracted as dividends will be minimised by ensuring that all shareholders’ dividend allowances and basic rate bands are used before declaring dividends that will be taxable at the higher rates.

Consideration could also be given to extracting profits in other ways, such as tax-free benefits and employer pension contributions.

Partner note: www.gov.uk/government/publications/changes-to-tax-rates-for-property-savings-and-dividend-income

Disclaimer

This article is not intended to be tax advice. Each person's tax circumstances are different; therefore, we recommend that you contact us for personalized tax advice. Sam Niranjan & Co., or Sivasambu Candesamy Niranjan, will not accept any responsibility whatsoever if you make any loss as a result of relying on this article.