For limited company directors and investors alike, dividend tax is one of the more nuanced parts of the UK tax system. Get it wrong and you could overpay, or find yourself with an unexpected bill. What follows covers the current rates, the £500 allowance, what HMRC expects you to report, and how to keep your liability as low as possible.
What Is Dividend Tax?
When a company makes a profit and pays some of it to its shareholders, that payment is called a dividend. It could come from shares in a listed company or from your own limited company. Either way, it usually counts as taxable income.
Dividend income is added on top of everything else you receive, including salary, pension and rental income, when your tax band is worked out. This is sometimes called stacking. It matters because some of your dividends could fall into a higher tax band than you expected.
Dividend tax rates are lower than the equivalent Income Tax rates, and genuine dividends do not attract National Insurance. That is why many limited company directors take a salary and then draw further income as dividends.
Dividend tax applies to dividend income you receive as a shareholder. Sell the shares later at a profit and Capital Gains Tax is considered separately. Sole traders cannot pay themselves dividends because they do not hold shares in their business.
Dividend Tax Rates and Income Brackets
The dividend tax rates changed on 6 April 2026.
For 2025/26:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
For 2026/27:
- Basic rate: 10.75%
- Higher rate: 35.75%
- Additional rate: 39.35%
The basic-rate band normally runs up to total income of £50,270. The higher rate covers income from £50,271 to £125,140, with the additional rate applying above that.
Two allowances reduce what you owe.
The standard Personal Allowance is £12,570 in both years. Any unused amount can cover dividend income tax-free. The allowance starts to reduce once your adjusted net income exceeds £100,000.
You also receive a £500 dividend allowance. This is a 0% tax band, so the first £500 of dividend income is not taxed. It still uses part of the tax band it falls into.
Dividends sit on top of your other income. Say you earn a £48,000 salary. The first £500 of dividends is covered by the dividend allowance. The next £1,770 remains below the £50,270 threshold. Anything above that falls into the higher-rate band.
The higher-rate threshold is set to remain at £50,270 until 5 April 2031. As incomes rise, more people may find that part of their dividend income moves into the higher-rate band.
How Much Tax Do You Pay on a Dividend? Worked Examples
These examples use the 2025/26 rates: a Personal Allowance of £12,570, a dividend allowance of £500 and the basic-rate band ending at £50,270.
Example 1: Low Earner
Chris earns £12,700 from part-time work and receives £300 in dividends. The Personal Allowance covers most of the salary, while the £300 of dividends is fully covered by the £500 dividend allowance.
Dividend tax due: £0.
Example 2: Basic-Rate Taxpayer
Alex has total income of £35,000, including £5,000 in dividends. After the Personal Allowance and dividend allowance are taken into account, £4,500 of the dividends is taxed at 8.75%.
Dividend tax due: £393.75.
Example 3: Straddling the Higher-Rate Threshold
Sam receives a £40,000 salary and £20,000 in dividends, giving total income of £60,000.
After the Personal Allowance, £9,770 of the dividends is taxed at 8.75%. A further £9,730 is taxed at 33.75%.
Total dividend tax due: £4,138.75.
Where a Self Assessment return is required, dividends received during 2025/26 must be reported and the tax paid by 31 January 2027.
How to Legally Reduce Your Dividend Tax Bill
Use a Stocks and Shares ISA
Dividends received inside an ISA do not attract Income Tax. Gains made inside it are also free from Capital Gains Tax. The ISA allowance is £20,000 for both 2025/26 and 2026/27.
If you are investing for income, holding dividend-paying shares inside an ISA can make a meaningful difference over time.
Make Pension Contributions
Under relief at source, a gross personal pension contribution can extend your basic-rate band. A £10,000 gross contribution can move the ceiling from £50,270 to £60,270.
That could keep more of your dividends in the basic-rate band instead of moving them into the higher-rate band. The usual pension contribution, earnings and tax-relief limits still apply.
Use Your £500 Allowance Every Year
The dividend allowance cannot be carried forward. If you do not use it during the tax year, it is lost.
Share Investments With a Spouse or Civil Partner
If your spouse or civil partner pays tax at a lower rate, transferring dividend-producing shares to them could reduce the household’s overall tax bill.
The transfer must be genuine. Ownership of the shares must actually change, rather than the income simply being redirected. Transfers between spouses or civil partners living together are normally made on a no-gain, no-loss basis for Capital Gains Tax.
Time Your Dividends
If you run your own limited company, you have some control over when dividends are declared. Taking a dividend during a year when your other income is lower could mean more of it is taxed at a lower rate.
The company must have enough distributable profit to support the dividend. The declaration, meeting records and dividend voucher also need to be completed properly.
Dividends or Salary: Which Is More Tax-Efficient?
Salary can attract both employer and employee National Insurance. Employer National Insurance normally starts once annual salary exceeds £5,000. Employee National Insurance normally starts at £12,570.
The standard employer rate is 15%, while the standard employee rate is 8% within the main band. These figures apply in both 2025/26 and 2026/27.
There is no single right salary figure for every director. It depends on Employment Allowance eligibility, whether the company has other employees, the director’s National Insurance record and what other income they receive.
Earnings at or above the Lower Earnings Limit can count towards a qualifying year for State Pension purposes, even where no employee National Insurance is deducted. The annual limit is £6,500 for 2025/26 and £6,708 for 2026/27.
Corporation Tax also needs to be considered. Salary is normally a deductible business expense, so it reduces the company’s taxable profit. Dividends are not deductible and are paid after Corporation Tax.
The small profits rate is 19% for profits of £50,000 or less. The main rate is 25% for profits above £250,000, with Marginal Relief available between the two. Associated companies and short accounting periods can reduce those thresholds.
For many directors, a mixture of salary and dividends can produce a better result than taking everything as salary. But the right split depends on company profits and your personal tax position. This is where the actual numbers matter more than a general rule of thumb.
Does HMRC Know About Your Dividends?
HMRC can check dividend income against company records and other information it holds. More importantly, you are responsible for declaring taxable dividend income correctly.
Companies must prepare dividend vouchers and keep copies in their records. HMRC can ask to see those records if it checks a tax return.
As a general guide:
- Dividends covered by your unused Personal Allowance and £500 dividend allowance: there is no dividend tax to pay. If you do not already complete Self Assessment, you normally do not need to tell HMRC. If you do complete a return, include the dividend income.
- Dividend income of £10,000 or less where tax is due: include it on your Self Assessment return if you already file one. Otherwise, tell HMRC after the end of the tax year and before 5 October. HMRC may collect the tax through your PAYE code or arrange another way for you to pay.
- Dividend income over £10,000: you need to complete a Self Assessment tax return. If you are not already registered, tell HMRC by 5 October after the end of the tax year.
The online filing and payment deadline for dividend income received in 2025/26 is 31 January 2027.
Taking Dividends From Your Limited Company?
Whether you are a director working out the salary and dividend split or an investor trying to understand your tax position, getting the figures right can make a meaningful difference.
At Reed & Co., we help limited company directors, sole traders and landlords across Bristol, Bath and Gloucester understand what they owe and why. Contact us for a free initial consultation.
