Until now, a tax return simply stated total dividend income for the year. Dividends from a director’s own company were bundled together with dividends from other sources, such as quoted shares or investment funds. HMRC could see the total income, but had little visibility over where it came from or how it related to ownership or control.
HMRC has long been uncomfortable with this lack of detail as dividends paid by close companies are often part of a wider remuneration strategy alongside salary, benefits, or loans to directors.
What is a close company?
A close company is broadly a UK‑resident company that is controlled by five or fewer participators, or by any number of participators who are also directors. In practice, most small private limited companies where shareholders are also directors fall into this category.
What is changing from 2025/26?
From 6 April 2025, directors of close companies are required to provide additional, mandatory disclosures on their tax returns. Specifically, they now must state:
- that they were a director of a close company during the year;
- the name and Companies House registration number of that company;
- the amount of dividends received from that company (even if none were paid); and
- the highest percentage shareholding held at any point during the tax year
Dividends from close companies must therefore now be reported separately from other dividends. This creates a clear link between shareholder, company and the dividend flow. There is a risk of penalties for failing to report this information accurately.
Why the change?
It is commonplace for dividends from close companies to be administered informally. Money may be drawn during the year and later allocated to dividends once the accounts are prepared.
The new disclosure regime makes this approach far riskier. By explicitly linking dividends received to shareholdings and directorships, HMRC gains a clear starting point to ask whether dividends were:
- properly declared at the time;
- paid out of available distributable reserves; and
- consistent with legal ownership.
Where HMRC is not satisfied that a dividend was validly declared, it may be recharacterised – for example as a director’s loan. That can reopen exposure to director’s loan account issues and, potentially, wider company‑level tax consequences (e.g. through s455 tax)..
Dividend waivers are also a common tool used by directors of close companies to pay dividends, particularly in family companies where shareholders have differing income needs. However, they have always required careful execution, and the new disclosures increase the stakes.
The requirement to disclose the highest shareholding percentage during the year gives HMRC a clear benchmark against which dividend outcomes can be assessed. Repeated waivers, poorly timed waivers, or waivers that consistently redirect income to family members in lower tax bands are more likely to attract attention – especially where documentation is weak or prepared late.
What this means in practice
These changes should not be seen as an attack on dividend planning. There is no indication of a shift in policy towards higher taxation of dividends themselves. Instead, the risk lies in informality and inconsistency.
Going forward, there should be more focus on ensuring that:
- dividends are declared properly and contemporaneously;
- dividend vouchers and minutes exist and are correctly dated;
- dividend waivers are used sparingly and evidenced clearly; and
- personal tax return disclosures align fully with company records.
For well‑run companies with good governance, the impact should be limited. For those relying on historical habits and informal processes however, advice should be sought to ensure systems can be put in place to mitigate risk.
If you’d like to discuss these new rules in detail, contact your usual Kilsby Williams contact or Company.Secretarial@kilsbywilliams.com
