If you run a small business in the UK, your company is almost certainly classified as a close company. Broadly speaking, the UK tax authorities define a close company as a private limited company controlled by five or fewer shareholders, or by any number of shareholders who are also directors.
Historically, being a close company simply meant you had complete control over your own finances. However, recent and upcoming changes to UK tax laws mean close companies are now facing some of the tightest regulations in years. Here’s a breakdown of the biggest changes hitting close companies.
The end of hidden dividends: mandatory reporting
From the 2025/26 tax year onwards, HMRC is enforcing strict new reporting rules. Previously, you could lump all of your personal dividend income into one single figure on your Self Assessment tax return. Moving forward, you must declare your close company director status and share:
- The exact name and registered company number of your business
- The precise amount of dividend income you personally extracted
- The highest percentage of share capital you held at any point during that tax year
HMRC is using this information data to track exactly who is extracting what from small businesses, making accurate bookkeeping more critical than ever.
Higher penalties on director loans
It’s common for small business owners to borrow money from their own company via a director’s loan account. If you fail to repay this loan within 9 months and one day of your company’s accounting year-end, the company must pay a temporary penalty tax.
From 6 April this year this tax rate is rising to 35.75% (up from 33.75%). This increase aligns the penalty tax with the upper dividend tax rate, designed specifically to stop business owners from using long-term, tax-free loans as a substitute for income.
Profit extraction is getting more expensive
Extracting profits through dividends has traditionally been a highly tax-efficient route for owner-directors. However, personal dividend tax rates across all bands are moving upward:
- Basic Rate: Rising to 10.75% (up from 8.75%)
- Higher Rate: Rising to 35.75% (up from 33.75%)
- Additional Rate: Rising to 41.35% (up from 39.35%)
While dividends may still be preferable to a high salary due to National Insurance savings, the financial gap between the two strategies is narrowing.
Exit tax rising
If your long-term plan involves selling your business, the tax cost of your exit is increasing. The Capital Gains Tax rate applied under Business Asset Disposal Relief (BADR) – which applies to the sale of qualifying business assets – rose to 18% on 6 April 2026. For context, this rate was just 10% in 2024 and 14% in 2025. Leaving your business requires much more strategic timing to protect your hard-earned wealth.
What next?
The net is tightening around owner-managed businesses. To avoid unexpected penalties and minimise your tax liability, it’s important to work with your accountant to review how you extract money from your company. Every business is unique. Our friendly team can help discover the most efficient salary-to-dividend split for your specific circumstances.