Dividends are a tax-efficient way for company directors and shareholders to extract profits from their business. Understanding how dividend tax works helps you plan the most efficient mix of salary and dividends. This guide covers current rates, allowances, and calculation methods for the 2025/26 tax year.
Dividend Tax Rates 2025/26
| Tax Band | Income Range | Dividend Rate |
|---|---|---|
| Allowance | First £500 | 0% |
| Basic rate | £12,571 - £50,270 | 8.75% |
| Higher rate | £50,271 - £125,140 | 33.75% |
| Additional rate | Over £125,140 | 39.35% |
The Dividend Allowance
The dividend allowance has decreased significantly in recent years:
| Tax Year | Dividend Allowance |
|---|---|
| 2017/18 - 2022/23 | £2,000 |
| 2023/24 | £1,000 |
| 2025/26 | £500 |
The reduced allowance means more dividend income is now taxable. For a higher-rate taxpayer, the reduction from £2,000 to £500 costs an extra £506.25 in tax per year.
Try Our Free Dividend Tax Calculator
Get instant results with our Dividend Tax Calculator. Also check our Income Tax Calculator and Capital Gains Tax Calculator.
How Dividend Tax Is Calculated
Dividend income is added to your other income to determine which tax band applies:
Example: Director with Salary + Dividends
Salary: £12,570 (just below NI threshold)
Dividends: £40,000
Total income: £52,570
Personal Allowance: £12,570 (covers salary)
Dividend Allowance: £500 (tax-free)
Basic rate dividends: £37,200 @ 8.75% = £3,255
Higher rate dividends: £2,300 @ 33.75% = £776.25
Total dividend tax: £4,031.25
Dividends vs Salary Comparison
Why are dividends often more tax-efficient than salary?
| Factor | Salary | Dividends |
|---|---|---|
| Employer's NI | 15% above £5,000 | None |
| Employee's NI | 8% (£12,570-£50,270) | None |
| Basic rate tax | 20% | 8.75% |
| Higher rate tax | 40% | 33.75% |
| Corporation Tax first | No | Yes (19-25%) |
Optimal Salary/Dividend Mix 2025/26
For most company directors, the optimal strategy is:
- Salary of £12,570: Uses personal allowance, no income tax or NI for employee
- Remaining profits as dividends: Lower tax rate than salary
Comparison: £50,000 Extraction
| Method | Take-Home | Total Tax/NI |
|---|---|---|
| All salary | ~£37,500 | ~£12,500 |
| Optimal mix* | ~£40,800 | ~£9,200 |
*£12,570 salary + remaining as dividends, including Corp Tax
Corporation Tax Consideration
Remember: dividends come from post-corporation tax profits:
| Profit Level | Corporation Tax Rate |
|---|---|
| Up to £50,000 | 19% |
| £50,001 - £250,000 | 19-25% (marginal relief) |
| Over £250,000 | 25% |
For every £100 of company profit:
- Corporation Tax (19%): £19
- Available for dividend: £81
- Dividend tax (basic rate 8.75%): £7.09
- Net to shareholder: £73.91
Dividend Tax Calculator Example
Scenario: Higher Rate Taxpayer
Employment income: £40,000
Dividends received: £20,000
Total income: £60,000
Income tax on salary: £5,486 (using normal bands)
Dividend calculation:
• First £500: £0 (dividend allowance)
• Next £9,770 (up to £50,270): £855 @ 8.75%
• Remaining £9,730: £3,284 @ 33.75%
Total dividend tax: £4,139
Dividend Dates to Know
- Declaration date: When directors declare the dividend
- Record date: Shareholders on this date receive the dividend
- Payment date: When you actually receive the money
- Tax year: Dividend is taxable in the year it's paid, not declared
Documentation Required
For dividend payments to be valid:
- Board minutes: Record the decision to pay dividends
- Dividend voucher: Issue to each shareholder
- Sufficient profits: Can only pay from accumulated profits
- Bank record: Actual transfer of funds
Paying dividends when the company doesn't have sufficient distributable reserves is illegal. HMRC may reclassify these as salary (with NI consequences) or as a director's loan.
Dividend Investment Income
If you receive dividends from investments (not your own company), the same rates apply:
- ISA dividends: Tax-free (no limit)
- Pension dividends: Tax-free within pension
- General investment account: Subject to dividend tax after £500 allowance
Tax-Efficient Planning Tips
- Use both spouses' allowances: If both are shareholders, each gets £500 allowance
- Time dividend payments: Consider which tax year is more beneficial
- Pension contributions: Reduce taxable income to stay in lower bands
- ISA investments: Dividend income within ISAs is tax-free
- Consider retained profits: Sometimes keeping money in the company is more efficient
Reporting Dividends
You must declare dividends if:
- Total dividends exceed £10,000 (Self Assessment required)
- You have other income requiring Self Assessment
- Total income exceeds £100,000
If dividends are under £10,000 and you're not otherwise required to file Self Assessment, HMRC may adjust your tax code instead.
How Dividend Tax Is Calculated
Dividend tax in the UK follows a specific calculation order that determines how much tax you owe on dividend income. First, all your non-dividend income (salary, rental income, interest) is added together and taxed through the normal income tax bands. Your dividend income is then added on top, with the first £500 covered by the dividend allowance. Any dividends above the allowance are taxed at the rate corresponding to the band they fall into when stacked on top of your other income.
This stacking method means that dividends can push you into a higher tax band even if your salary alone is within the basic rate. For example, if you earn a salary of £45,000 and receive £15,000 in dividends, your total income of £60,000 means some dividends will be taxed at the higher rate of 33.75 percent rather than the basic rate of 8.75 percent. The basic rate band ends at £50,270 for 2025/26, so the first £5,270 of dividends above the £500 allowance would be at 8.75 percent, while the remaining dividends above the higher rate threshold would be at 33.75 percent.
For limited company directors who control their own dividend payments, the optimal salary and dividend combination requires careful annual calculation. The most tax-efficient strategy for 2025/26 typically involves paying a salary up to the National Insurance Primary Threshold of £12,570, which avoids both income tax and employee National Insurance, and then extracting additional profits as dividends. This approach saves approximately £2,000 to £5,000 per year compared to taking everything as salary, though the exact savings depend on the total amount extracted and whether you have other income sources.
• Within £500 allowance: 0% tax
• Basic rate band: 8.75% (compared to 20% on salary)
• Higher rate band: 33.75% (compared to 40% on salary)
• Additional rate band: 39.35% (compared to 45% on salary)
Dividends do not attract National Insurance contributions, adding to the tax saving versus salary for company directors.
Dividends for UK Investors
For individuals investing in shares through a general investment account, understanding dividend taxation is important for portfolio planning. UK-listed companies typically pay dividends twice a year, with an interim dividend and a final dividend. Dividend yields vary considerably across sectors, with utility companies, banks, and tobacco firms traditionally offering higher yields of 5 to 8 percent, while technology and growth companies typically offer lower yields or none at all, reinvesting profits for growth instead.
The reduction of the dividend allowance from £2,000 in 2022/23 to just £500 in 2025/26 has made tax-efficient wrappers more important than ever. Shares held within an ISA generate dividends that are completely free of income tax, regardless of the amount. With the annual ISA allowance at £20,000, building a significant dividend portfolio within an ISA over time can provide a substantial tax-free income stream. Pensions similarly shelter dividends from tax, with the added benefit of tax relief on contributions.
Dividend reinvestment is a powerful strategy for long-term wealth building. Rather than taking dividends as income, reinvesting them to purchase additional shares creates a compounding effect. Historical data from the UK stock market shows that dividends reinvested have accounted for approximately two-thirds of total investor returns over 30-year periods. Many UK investment platforms and share dealing accounts offer automatic dividend reinvestment plans (DRIPs) at no additional cost, making this strategy easy to implement.
Frequently Asked Questions
Do I pay National Insurance on dividends?
No, dividends are not subject to National Insurance contributions. This is one of the main reasons why limited company directors prefer to extract profits as a combination of low salary and dividends rather than taking everything as salary. While the total tax saving has reduced since the dividend tax rates were increased in 2022, dividends still offer a meaningful advantage. For a director extracting £60,000 from their company, the combined tax and National Insurance saving of the salary-plus-dividend approach versus all-salary is typically around £4,000 to £5,000 per year.
What is the difference between franked and unfranked dividends?
In the UK tax system, the terms franked and unfranked dividends are no longer commonly used following the removal of the dividend tax credit system in April 2016. Previously, UK dividends came with a notional tax credit that represented corporation tax already paid by the company. Under the current system, dividends are simply taxed at the applicable dividend rate after the dividend allowance. All UK company dividends are paid out of post-corporation-tax profits, and the dividend tax rates reflect this by being lower than the equivalent income tax rates on employment income.
How are overseas dividends taxed in the UK?
Dividends from foreign companies are taxed at the same UK dividend tax rates as domestic dividends. However, the dividend-paying country may also withhold tax at source, typically at rates between 10 and 30 percent. The UK has double taxation agreements with most major countries to prevent the same income being taxed twice. You can usually claim a tax credit for foreign withholding tax against your UK liability. If the foreign tax rate exceeds the UK rate, you cannot reclaim the excess. Holding overseas shares within an ISA can sometimes avoid foreign withholding tax, depending on the country's treaty with the UK.
How does the UK dividend allowance work for the 2025/26 tax year?
Should I hold dividend shares inside an ISA or a pension for UK tax efficiency?
What is the difference between dividend yield and dividend cover, and why do UK investors track both?
James Mitchell, ACCA
Chartered Accountant & Former HMRC Advisor
James is a Chartered Certified Accountant (ACCA) specialising in UK personal taxation and financial planning. With over 12 years in practice and a background as a former HMRC compliance officer, he brings authoritative insight to complex tax topics.