HMRC's 2026 consultation, 'Modernising the taxation of distributions and repayments of capital from companies', is a proposal only, not law. Published on 23 June 2026 and closing 14 September 2026, it changes nothing you file today. The current 2026/27 rules on dividends, buybacks, winding-up and director's loans still apply in full.
If you own a limited company, this is the framework that decides how you get value out of it, and whether HMRC treats that value as income (taxed as a dividend) or as capital (taxed under Capital Gains Tax). The gap between those two routes can be tens of thousands of pounds, which is exactly why the consultation matters even though it is not yet in force.
What is the 2026 company distributions consultation?
At Tax Update 2026 on 23 June 2026, HM Treasury and HMRC published a 12-week consultation titled 'Modernising the taxation of distributions and repayments of capital from companies'. It closes on 14 September 2026. The distributions framework it looks at has been largely unchanged since Corporation Tax was introduced in 1965, so the government is asking whether the rules are still fit for purpose.
Crucially, this is a consultation, a request for views. There is no draft legislation, no commencement date and nothing to file. Anyone telling you the rules on dividends or winding-up have already changed is wrong. What follows first is the law as it actually stands for 2026/27, then a plain summary of what the consultation proposes.
Why does how you extract money from your company matter?
Your company's profit is not your money until you take it out, and the method you choose sets the tax rate. Take it as a dividend and it is income, taxed at dividend rates. Wind the company up or buy back shares and, if the conditions are met, the same cash can be capital, taxed under CGT at lower rates. The rules that police the boundary between the two, and stop people dressing income up as capital, are the ones under review. For a wider view of the extraction options, see our guides to paying dividends from a limited company and salary vs dividends for 2026/27.
What are the current 2026/27 dividend tax rates?
Dividends are the standard income route. For 2026/27 you get a £500 dividend allowance (taxed at 0%), then dividend Income Tax at:
- 10.75% in the basic-rate band
- 35.75% in the higher-rate band
- 39.35% in the additional-rate band
The basic and higher rates rose two points from 6 April 2026 under Autumn Budget 2025. The old 8.75% and 33.75% rates applied to 2025/26 and earlier only, so do not use them for a 2026/27 dividend.
How is a solvent winding-up (MVL) taxed in 2026/27?
When a solvent company is closed through a Members' Voluntary Liquidation (MVL), the cash distributed to shareholders is a capital distribution, taxed under CGT rather than as a dividend. For 2026/27 the CGT rates on shares are 18% within the basic-rate band and 24% for higher and additional-rate taxpayers, after the £3,000 annual exempt amount.
What about Business Asset Disposal Relief?
If you qualify for Business Asset Disposal Relief (BADR), the rate on the gain is just 18% from 6 April 2026 (it was 14% in 2025/26 and 10% up to 5 April 2025) on up to £1,000,000 of lifetime qualifying gains. To qualify you must hold at least 5% of the ordinary share capital and be an officer or employee for at least two years in a trading company, and the disposal date sets the rate. This is the route covered in depth in our guide to closing a limited company tax-efficiently.
What is the anti-phoenixing TAAR and when does it bite?
The capital route on a winding-up is not a free pass. A Targeted Anti-Avoidance Rule, section 396B ITTOIA 2005, can re-characterise an MVL capital distribution as an income dividend if you carry on a similar trade or activity within two years of the distribution. In other words, close the company, bank the low CGT rate, then restart the same line of work, and HMRC can tax the whole distribution at dividend rates instead. This "phoenixing" trap is one of the areas the consultation touches, but the TAAR is live law right now.
How does Purchase of Own Shares work right now?
When a company buys back its own shares from a departing shareholder, the payment is treated as an income distribution by default. It can qualify for capital (CGT) treatment only if the statutory conditions are met: broadly that the buyback benefits the trade, the seller's holding is substantially reduced (the 25% and five-year-ownership tests), and the seller is UK resident. Because the current "trade benefit" test is subjective, buybacks often need advance clearance from HMRC to give certainty. The consultation wants to make these conditions more mechanical.
What is the section 455 charge on a director's loan?
If a director or participator owes the company money, an overdrawn director's loan account still unpaid nine months and one day after the accounting period end triggers a section 455 charge. For loans made on or after 6 April 2026 the rate is 35.75% (up from 33.75%, because it tracks the dividend upper rate). The company pays it through the CT600A supplement to the Corporation Tax return, and it is fully reclaimable once the loan is repaid, written off or released. Our dedicated s455 tax guide walks through the mechanics and the reclaim timing.
Income vs capital: how do the treatments compare?
Here are the four main routes side by side, on current 2026/27 rates.
| Route | Default treatment | Tax and rate 2026/27 | Key condition or relief |
|---|---|---|---|
| Dividend | Income | 10.75% / 35.75% / 39.35% after £500 allowance | Must have distributable reserves; voucher and board minute |
| Solvent winding-up (MVL) | Capital (CGT) | 18% / 24% after £3,000 AEA, or 18% BADR on up to £1m | BADR needs 5% holding, officer/employee 2+ years, trading co. |
| Purchase of Own Shares | Income by default | Dividend rates, unless capital conditions met (then CGT/BADR) | Trade-benefit test, 25% and 5-year tests, UK residence |
| Overdrawn loan (s455) | Company charge | 35.75% on the balance outstanding after 9 months + 1 day | Paid via CT600A; reclaimable when the loan is repaid |
Worked example: dividend vs MVL on £120,000
A contractor-director has £120,000 of retained profit sitting in a company they are ready to close. They already have income using the higher-rate band. Compare the two routes.
Route 1: pay it as a higher-rate dividend
- £120,000 dividend, less the £500 dividend allowance = £119,500 taxable
- £119,500 × 35.75% = £42,721.25 Income Tax
Route 2: solvent MVL as a capital distribution under BADR
- £120,000 capital distribution, less the £3,000 annual exempt amount = £117,000 gain (assuming a negligible original subscription cost for the shares)
- £117,000 × 18% BADR = £21,060 Capital Gains Tax
The capital route saves £21,661.25 on the same £120,000. That is why owner-managers reach for an MVL when they are genuinely closing down. But watch the caveat: if the director restarts a similar trade within two years, the TAAR at s396B can re-characterise the £120,000 as an income dividend, taxing it at 35.75% and wiping the saving out entirely. The MVL only works if the closure is real. For the CGT mechanics behind this, see our guide to capital gains tax on shares.
What is the consultation actually proposing to change?
The 2026 consultation seeks views (it does not yet legislate) on six main areas:
- How "new consideration" and "repayments of capital" are measured on share buybacks and capital reductions.
- Reforming statutory demerger relief and removing the capital-reduction demerger route.
- Replacing the subjective trade-benefit test for Purchase of Own Shares capital treatment with mechanical conditions, for example a 5% minimum holding, a two-year period and full surrender of the shares.
- A clearer, principles-based Transactions in Securities (TIS) anti-avoidance rule.
- Aligning Income Tax on distributions from non-UK resident companies with the rules for UK resident companies.
- Extending the loans to participators (s455) regime to loans from non-UK resident close companies.
Taken together, these would modernise a 60-year-old framework and swap several judgement calls for bright-line tests. None of it is in force, and the final shape will depend on the responses HMRC receives by 14 September 2026.
What should owner-managers do now?
The honest answer for 2026/27 is: there is nothing to file because of this consultation, and no new rule to apply. But there is sensible housekeeping that pays off whatever the outcome:
- Keep your dividend vouchers and board minutes clean and dated, with reserves confirmed before each dividend.
- Watch your director's loan account through the year so you are not caught by the 35.75% s455 charge nine months after year end.
- Take advice before any buyback, capital reduction or winding-up. These are exactly the transactions the consultation targets, and the capital-vs-income line is where the tax is won or lost.
- If you contract through a company, our accounting service for contractors keeps the extraction strategy and the paperwork on the right side of these rules.
Want a second opinion before you close a company or buy out a shareholder? Our qualified accountants will map the income-versus-capital position for your specific numbers. Book a free call with Zmartly and we will tell you which route is genuinely cheaper, and safe, for you.
Frequently asked questions
Has the tax on company distributions changed in 2026?
No. The 2026 document is a consultation published on 23 June 2026 and closing on 14 September 2026. It is a proposal only, with no draft legislation and no start date. The current 2026/27 rules on dividends, winding-up, buybacks and director's loans all still apply, and there is nothing new to file because of it.
Is a members' voluntary liquidation still taxed as capital in 2026/27?
Yes. A distribution on a solvent winding-up (MVL) is a capital distribution taxed under Capital Gains Tax at 18% or 24% after the £3,000 annual exempt amount, or at 18% under Business Asset Disposal Relief on up to £1m of lifetime gains if you qualify. The anti-phoenixing TAAR can turn it into an income dividend if you restart a similar trade within two years.
What is the section 455 rate for 2026/27?
For loans to a participator made on or after 6 April 2026, the section 455 charge is 35.75%, up from 33.75%, because it tracks the dividend upper rate. It applies to an overdrawn director's loan still outstanding nine months and one day after the accounting period end, is paid by the company via the CT600A, and is reclaimable once the loan is repaid, written off or released.
Do I need to do anything about the distributions consultation now?
Not in terms of filing. There is no new rule to apply for 2026/27. Sensible steps are keeping dividend vouchers and board minutes tidy, monitoring your director's loan account, and taking advice before any buyback, capital reduction or winding-up, as those transactions are the ones the consultation is aimed at.
