What Is the Dividend Tax Allowance in the UK?

Dividends are payments made by a company to its shareholders from after-tax profits. They are taxed differently from salary — at lower rates and without National Insurance — which makes them attractive for company directors extracting profits from their own limited companies. However, dividend tax has become progressively more expensive since 2016 as HMRC has tightened the regime.

The Dividend Allowance

Every UK resident has a Dividend Allowance — an amount of dividend income that can be received tax-free each year. For 2025/26, the Dividend Allowance is £500. This is a significant reduction from earlier years: it was £5,000 when introduced in 2016, cut to £2,000 in 2018, reduced to £1,000 in April 2023, and then halved again to £500 from April 2024.

Dividend Tax Rates

Dividends above the £500 allowance are taxed at rates that depend on your overall income tax band. Basic rate taxpayers pay 8.75% on dividends. Higher rate taxpayers pay 33.75%. Additional rate taxpayers pay 39.35%. These rates apply to dividends above the allowance, and dividends are treated as the top slice of income — meaning they are taxed at the highest applicable rate.

How Dividends Are Taxed in Practice

Suppose you are a director of a limited company with a salary of £9,100 (below the NI threshold) and dividends of £40,000 from your company in 2025/26. Your salary uses part of your Personal Allowance. The remaining allowance (£3,470) shelters some dividend income. Then the first £500 of dividends is within the Dividend Allowance. Dividends up to the basic rate threshold of £50,270 are taxed at 8.75%. With planning, the effective overall tax rate for a director extracting £49,100 (salary plus dividends) can be kept significantly below the equivalent PAYE position.

Reporting Dividend Income

If your dividend income exceeds the £500 allowance, you must report it. If you are not already filing a Self-Assessment return, you may need to start. Dividends can be reported via Self-Assessment or, for smaller amounts (under £10,000), by phoning HMRC's income tax helpline. Dividends from ISAs are exempt from tax and need not be reported.

Director's Salary and Dividend Strategy

Most owner-directors pay themselves a small salary (typically around the Secondary NI Threshold, approximately £9,100 for 2025/26) to maintain a State Pension Qualifying Year without incurring NI. Additional profits are extracted as dividends. The optimal salary level depends on whether the Employment Allowance is available to the company (which absorbs employer NI up to £5,000 per year). With the Employment Allowance, some directors raise their salary to the Personal Allowance level (£12,570) as the employer NI on the difference is covered by the allowance.

Impact of the Reduced Allowance

The reduction in the Dividend Allowance from £2,000 to £500 over 2023 and 2024 has significantly reduced the tax advantage of dividends over salary for directors. For a higher rate taxpayer taking £30,000 in dividends, the additional annual cost due to the reduced allowance is around £507. Tax planning is more important than ever to optimise the salary/dividend split.