Dividend Tax Rates UK 2025/26: Complete Director and Investor Guide
Dividend tax rates, the £500 allowance, how to calculate your tax bill, and the optimal salary/dividend split for limited company directors.
Dividend Tax Rates 2025/26
For the 2025/26 tax year, dividend income is taxed at the following rates after the £500 dividend allowance:
The £500 Dividend Allowance
The dividend allowance for 2025/26 is £500. This means the first £500 of dividend income you receive in the tax year is completely free from dividend tax, regardless of your income tax band.
| Tax Year | Dividend Allowance | Change |
|---|---|---|
| 2017/18 – 2022/23 | £2,000 | — |
| 2023/24 | £1,000 | −£1,000 |
| 2024/25 | £500 | −£500 |
| 2025/26 | £500 | Unchanged |
The dramatic reduction from £2,000 (2022/23) to £500 (2024/25 onwards) has brought many more investors and directors into dividend tax liability. Even a modest portfolio generating income above £500 now requires Self Assessment reporting.
How Dividends Are Taxed: Step by Step
- Add up all your non-dividend income (salary, pension, rental income, self-employment profits, interest).
- Apply the personal allowance (£12,570) to reduce your taxable non-dividend income.
- Your non-dividend income fills the tax bands first (basic rate band up to £50,270; higher rate band to £125,140).
- Dividends are then stacked on top. The first £500 is covered by the dividend allowance (0% tax).
- Remaining dividends are taxed at 8.75%, 33.75%, or 39.35% depending on which band they fall into.
- Dividends do not trigger National Insurance under any circumstances.
Worked Example: Director Taking £50,000 Total
Scenario: Director, £12,570 salary + £37,430 dividends = £50,000 total
| Component | Amount | Tax |
|---|---|---|
| Salary | £12,570 | £0 (within personal allowance) |
| Dividend allowance | £500 | £0 |
| Dividends at 8.75% (basic rate band) | £36,930 | £3,231.38 |
| Total dividend tax | £37,430 | £3,231.38 |
Employer NI is also zero on the salary portion since £12,570 is above the Secondary Threshold (£9,100) — the company pays employer NI at 15% on salary above £9,100, costing £532.50 in employer NI.
Scenario: Director Taking £80,000 Total (£12,570 salary + £67,430 dividends)
| Component | Amount | Tax |
|---|---|---|
| Salary | £12,570 | £0 (within personal allowance) |
| Dividend allowance | £500 | £0 |
| Dividends at 8.75% (within basic rate band to £50,270) | £37,200 | £3,255 |
| Dividends at 33.75% (higher rate band, £50,271 to £80,000) | £29,730 | £10,033.88 |
| Total dividend tax | £67,430 | £13,288.88 |
Employer NI on salary: £(12,570 - 9,100) × 15% = £520.50
Total tax and NI burden: £13,288.88 + £520.50 = £13,809.38 on £80,000 gross income.
Optimal Director Salary + Dividend Strategy 2025/26
Option 1: Salary at NI Secondary Threshold (£9,100)
Taking salary at exactly £9,100 means:
- No Employer National Insurance for the company (Secondary Threshold is £9,100 for 2025/26)
- No Employee National Insurance (Primary Threshold is £12,570)
- No income tax on salary (within personal allowance)
- The remaining £3,470 of personal allowance (£12,570 minus £9,100) can shelter additional dividend income
- State Pension qualifying year is earned as salary is above the Lower Earnings Limit (£6,396)
Downside: The company cannot claim corporation tax relief on the £3,470 difference between £9,100 and £12,570 — that margin would otherwise reduce the corporation tax bill at 25% (for profits above £50,000).
Option 2: Salary at Personal Allowance (£12,570)
Taking salary at £12,570 means:
- No income tax on salary (exactly uses up personal allowance)
- No Employee National Insurance (below Primary Threshold)
- Employer NI cost to the company: (£12,570 − £9,100) × 15% = £520.50
- Company saves corporation tax: £12,570 × 25% = £3,142.50 (net benefit after NI = £2,622)
- Maximum pension qualifying earnings base
For companies paying 25% corporation tax (profits over £50,000), the salary at personal allowance is usually the better option, as the corporation tax relief on the salary more than offsets the employer NI cost.
Salary vs Dividend: Which Is More Tax Efficient?
| Factor | Salary (PAYE) | Dividends |
|---|---|---|
| Income tax (basic rate) | 20% | 8.75% |
| Income tax (higher rate) | 40% | 33.75% |
| Employee NI (below £50,270) | 8% | 0% |
| Employer NI | 15% (above £9,100) | 0% |
| Corporation tax saving for company | Yes (25% or 19%) | No (paid from post-tax profit) |
| Pension contribution eligibility | Yes (pensionable earnings) | No (dividends not pensionable) |
| Mortgage/loan evidencing income | Easier (P60/payslip) | More complex (SA302 required) |
| State benefits entitlement | Builds entitlement | Does not count |
For most limited company directors with profits above the personal allowance, a low salary plus maximum basic rate dividends is the most tax-efficient approach. The exact optimal salary depends on the company's corporation tax rate and the director's personal circumstances.
ISA Dividends: Completely Tax-Free
Dividend income received within a Stocks and Shares ISA or Lifetime ISA is completely exempt from income tax. This includes the dividend tax, meaning you pay 0% on dividends regardless of the amount or your income tax band.
The ISA allowance for 2025/26 is £20,000 per adult. By holding dividend-paying investments inside an ISA, even substantial dividend income from a portfolio of investment trusts, equity income funds, or individual shares incurs no tax at all.
History of Dividend Tax Rates
Before 6 April 2016, dividends were taxed using a "tax credit" system where dividends came with a notional 10% credit attached. This was replaced with the current system of taxing gross dividends directly at the rates above.
When first introduced in 2016/17, the dividend allowance was a generous £5,000 per year. It was reduced to £2,000 in 2018/19 and remained there until 2023/24 when it was cut to £1,000, and then again to £500 from April 2024. The rates themselves (8.75%, 33.75%, 39.35%) have remained unchanged since April 2022, when they were increased by 1.25 percentage points to fund social care (the Health and Social Care Levy, which was subsequently reversed on other taxes but retained for dividends).
Reporting Dividends to HMRC
You must register for and file a Self Assessment tax return if your dividend income exceeds the £500 allowance. You need to:
- Register for Self Assessment by 5 October following the end of the relevant tax year
- Complete the "UK interest and dividends" pages of your tax return
- Include all UK and overseas dividends received in the year
- File the online return by 31 January (for 2025/26: 31 January 2027)
- Pay any tax due by 31 January 2027
Your company's dividend vouchers (or broker statements for investment portfolio dividends) are your evidence of the dividends received. Ensure dividend vouchers are prepared correctly and filed with board minutes for every dividend declared by your limited company.
IR35 and Disguised Employment
IR35 legislation is designed to prevent "disguised employment" — where a worker provides services through a personal service company (PSC) but is effectively an employee of the end client. If HMRC determines your working arrangement falls inside IR35:
- All income from that contract is treated as employment income
- You must pay income tax and NI as if you were directly employed
- The dividend/salary split becomes ineffective for IR35-caught contracts
From April 2021, medium and large private sector companies became responsible for determining IR35 status (off-payroll working rules). Small companies are exempt, meaning the director's PSC remains responsible for its own IR35 status assessment.
Director Loan Accounts and S455 Charge
If a director borrows from their company and the director's loan account (DLA) is overdrawn at the end of the company's accounting year, and the balance is not repaid within nine months, the company must pay a Section 455 (S455) charge at 33.75% of the outstanding balance. This is refundable once the loan is repaid but is an expensive cash-flow cost.
It is important to declare dividends formally rather than treating company money as a personal piggy bank. Informal drawings that exceed declared dividends create an overdrawn DLA and trigger S455 liability.
Pension as an Alternative to Dividends
Instead of taking dividends, a limited company director can make employer pension contributions directly from the company. These contributions:
- Reduce corporation tax (the company receives CT relief at 25% or 19%)
- Are not subject to income tax when contributed (unlike salary above personal allowance)
- Are not subject to NI
- Grow free of income tax and CGT within the pension
- Are subject to income tax on withdrawal (but often at basic rate after taking 25% tax-free cash)
For higher and additional rate taxpayers, employer pension contributions are often more tax-efficient than dividends when maximising long-term wealth. The annual allowance for pension contributions is £60,000 for 2025/26 (or 100% of relevant UK earnings if lower, though employer contributions do not require earnings).
Frequently Asked Questions
For 2025/26, dividend tax rates are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. The first £500 of dividends is covered by the dividend allowance and is tax-free regardless of your income tax band. Dividends are never subject to National Insurance.
The dividend allowance for 2025/26 is £500. This means the first £500 of dividend income you receive in the tax year is free from dividend tax. This was reduced from £2,000 in 2022/23 to £1,000 in 2023/24, then to £500 from April 2024. The allowance cannot be carried forward and cannot be transferred to a spouse.
The optimal strategy is to take a salary of £9,100 (no employer or employee NI) or £12,570 (uses full personal allowance, company saves corporation tax on the salary cost), then extract additional profit as dividends. Keep dividends within the basic rate band (up to £50,270 total income) to pay only 8.75% dividend tax. Spouse or civil partner dividend income can also be arranged if they hold shares, using their personal allowance and dividend allowance.
Yes. Dividends are treated as income for UK tax purposes and are added to your other income to determine your total income and therefore your tax band. However, dividends do not trigger National Insurance contributions. They also do not count as "relevant UK earnings" for pension contribution purposes, which is why directors often take some salary to maximise pension contribution eligibility.
Dividends above the £500 allowance must be reported via Self Assessment. Complete the UK interest and dividends pages of your return, entering total dividend income from UK companies separately from overseas dividends. Your company's dividend vouchers or investment platform statements provide the necessary figures. The filing deadline is 31 January 2027 for 2025/26 dividends, with payment also due by this date.
For most directors, a combination of low salary plus dividends is more tax-efficient than salary alone. Dividends are not subject to National Insurance (saving up to 13.8% employer NI and 8% employee NI), and the 8.75% basic rate dividend tax is lower than the 20% basic rate income tax. However, a purely dividend-based extraction provides no pensionable earnings and may complicate mortgage applications. The optimal mix depends on profit levels, personal circumstances, IR35 status, and long-term retirement planning.
Related Calculators and Guides
This guide is for information purposes only and does not constitute financial or tax advice. Tax rules are complex and depend on individual circumstances. Always consult a qualified accountant or tax adviser before making decisions. Rates and thresholds are correct for the 2025/26 tax year based on HMRC guidance current at February 2026.