UK Dividend Tax Guide 2025-26: Rates, £500 Allowance, and Director Strategies
Dividends are payments made by companies to their shareholders from post-tax profits. In the UK, dividend income receives more favourable tax treatment than employment income, which is why company directors frequently choose to pay themselves a combination of a low salary and high dividends. For 2025-26, the Dividend Allowance is £500, down from £1,000 in 2023-24 and £2,000 in 2022-23. This guide covers the full mechanics of dividend taxation and the strategies available to directors and investors.
Dividend tax rates for 2025-26
After the £500 tax-free Dividend Allowance, dividend income is taxed at these rates:
| Tax Band | Dividend Rate | Employment Income Rate (for comparison) |
|---|---|---|
| Basic rate (up to £50,270) | 8.75% | 20% |
| Higher rate (£50,271-£125,140) | 33.75% | 40% |
| Additional rate (over £125,140) | 39.35% | 45% |
The dividend rates are lower than the equivalent employment income rates because the company has already paid Corporation Tax (25% for 2025-26, or 19% for small profits under £50,000 via the small profits rate) on the profits before distributing them as dividends. The combined effective rate (Corporation Tax plus dividend tax) is designed to approximate the combined rate of Income Tax and NI on employment income, though the numbers do not match exactly.
How the Dividend Allowance works
The first £500 of dividend income in each tax year is tax-free, regardless of your tax band. This is the Dividend Allowance. The allowance does not reduce your taxable income or change your tax band. Instead, it applies a 0% rate to the first £500 of dividends. Dividends still count toward your total income for the purposes of determining your tax band and, critically, for the Personal Allowance taper above £100,000.
If you receive dividends from multiple companies or investment funds, the allowance applies to your total dividend income across all sources, not per company.
How dividends interact with your salary
Your salary uses up your Personal Allowance and tax bands first. Dividends are then stacked on top of your salary income. The dividend tax rate depends on which band the dividends fall into after your salary has been accounted for.
Example: you have a salary of £30,000 and receive £15,000 in dividends.
- Salary of £30,000 uses your £12,570 Personal Allowance and occupies the basic rate band up to £30,000.
- Your remaining basic rate band is £50,270 - £30,000 = £20,270.
- The first £500 of dividends is covered by the Dividend Allowance (0% tax).
- The remaining £14,500 falls within your remaining basic rate band, taxed at 8.75% = £1,268.75.
Total dividend tax: £1,268.75. Use our dividend tax calculator for your specific figures.
Director salary and dividend strategy
Company directors who control their own pay have the flexibility to set their salary at a level that minimises the combined tax burden of Corporation Tax, Income Tax, NI, and employer NI. The most common approach for 2025-26:
Optimal salary: £12,570 per year (the Personal Allowance threshold).
At this level, the director pays zero Income Tax on the salary (fully covered by the Personal Allowance) and zero employee NI (below the Primary Threshold of £12,570). However, the employer pays 15% employer NI on earnings above the Secondary Threshold of £5,000. That means employer NI of (£12,570 - £5,000) x 15% = £1,135.50. This is an allowable Corporation Tax deduction for the company.
Alternative: salary at £5,000
Some accountants recommend a salary of just £5,000 to avoid employer NI entirely. At £5,000, there is no employer NI (below the Secondary Threshold), no employee NI, and no Income Tax. The downside is that a salary below the Lower Earnings Limit (£6,396 for 2025-26) does not count as a qualifying year for State Pension purposes. Many directors prefer the £12,570 salary despite the £1,135.50 employer NI cost because it preserves pension entitlement and is fully offset by the Corporation Tax deduction.
Worked example: director taking £60,000 total
A director of a small limited company wants to extract £60,000 in total. Company profits before salary are £80,000.
Option A: all salary (£60,000)
- Income Tax: £9,486 (20% on £12,571-£50,270, 40% on £50,271-£60,000)
- Employee NI: £3,794 (8% on £12,570-£50,270, 2% on £50,270-£60,000)
- Employer NI: (£60,000 - £5,000) x 15% = £8,250
- Total personal tax: £13,280
- Corporation Tax saved: salary + employer NI are deductible, saving (£60,000 + £8,250) x 25% = £17,062.50
Option B: £12,570 salary + £47,430 dividends
- Income Tax on salary: £0 (covered by PA)
- Employee NI: £0
- Employer NI: £1,135.50
- Corporation Tax on profit available for dividends: company profit of £80,000 less salary of £12,570 less employer NI of £1,135.50 = £66,294.50 taxable. CT at 25% = £16,573.63. Profit after CT: £49,720.87.
- Dividends paid: £47,430 from the post-CT profit.
- Dividend tax: first £500 at 0%, next £37,200 (to fill basic rate band to £50,270) at 8.75% = £3,255, remaining £9,730 at 33.75% = £3,283.88. Total: £6,538.88.
- Total personal tax: £6,538.88
Option B saves the director roughly £6,741 in personal tax compared to Option A. However, the company pays more Corporation Tax because the salary deduction is smaller. The combined saving (personal tax plus company tax) still favours the salary-plus-dividend approach for most scenarios.
Dividends and the Personal Allowance taper
Dividend income counts toward the £100,000 threshold for the Personal Allowance taper. A director with a £50,000 salary and £55,000 in dividends has total income of £105,000, losing £2,500 of Personal Allowance. This affects the overall tax position and needs to be factored into extraction strategies. See the impact of the taper at £110,000 total income.
Dividends within an ISA or pension
Dividends received within a Stocks and Shares ISA are completely tax-free, with no limit on the amount. This makes ISAs particularly valuable for investors who receive dividend income above the £500 allowance. The annual ISA subscription limit is £20,000 for 2025-26.
Dividends received within a pension (SIPP or workplace scheme) are also tax-free while they remain in the pension. Tax is only paid when you draw the pension income, at your marginal Income Tax rate. The first 25% of pension withdrawals is tax-free.
Reporting dividends to HMRC
If your total dividend income (before the allowance) exceeds £500, you must tell HMRC. For employees with no Self Assessment obligation, HMRC can collect the tax by adjusting your tax code. For larger amounts or if you file Self Assessment anyway (as most directors do), dividends are reported on the tax return in the dividends section.
Frequently asked questions
Do I pay National Insurance on dividends?
No. Dividend income is not subject to National Insurance, either for the recipient or the company paying them. This is one of the key reasons the salary-plus-dividend strategy is tax-efficient: dividends avoid the 8% employee NI and 15% employer NI that would apply to salary. See our combined salary and dividend calculator.
Can I pay myself dividends if the company has no profits?
Dividends can only be paid from retained profits (accumulated profits after Corporation Tax). If the company has no retained profits or is in a loss position, paying dividends is illegal under the Companies Act 2006. If a director takes dividends without sufficient retained profits, HMRC and Companies House may reclassify them as salary (triggering NI liability) or as a director's loan (subject to a 33.75% Section 455 tax charge if not repaid within nine months of the company's year end).
My dividend income is £400. Do I need to report it?
If your total dividend income is £500 or less, it is fully covered by the Dividend Allowance and there is no tax to pay. You do not need to report it unless you are already filing a Self Assessment return for other reasons. If you file Self Assessment, include it for completeness even though no tax is due.
What happened to the £2,000 Dividend Allowance?
The Dividend Allowance was £2,000 from 2018-19 to 2022-23. It was reduced to £1,000 for 2023-24 and then to £500 for 2024-25 onwards. The reductions were announced by the then-Chancellor in the 2022 Autumn Statement as a revenue-raising measure. The allowance is not expected to increase again in the near future.
Are foreign dividends taxed the same way?
Yes, in principle. Foreign dividends are taxed at the same UK rates as UK dividends. However, foreign withholding tax may have been deducted at source. You can claim a tax credit for foreign tax paid, up to the amount of UK tax due on the same income, under double taxation agreements. The foreign dividend, converted to sterling at the exchange rate on the payment date, is reported on your Self Assessment return in the foreign income section.