Dividend Tax Explained: Rates, Allowance & How It Works (2025/26)

If you run a limited company, dividends are usually how you take most of your profit — and understanding dividend tax is key to paying yourself efficiently. Here’s how it works in 2025/26, in plain English.

What is a dividend?

A dividend is a payment a company makes to its shareholders out of its profits after Corporation Tax. As a company director-shareholder, you typically pay yourself a small salary plus dividends, because dividends are taxed more favourably than salary and carry no National Insurance.

The dividend allowance

Everyone gets a dividend allowance — for 2025/26 it’s £500. The first £500 of dividends you receive each year is tax-free, on top of any unused personal allowance.

The allowance has shrunk a lot in recent years (it was £2,000 not long ago), so dividend tax now bites sooner than many directors expect.

The dividend tax rates

Above the £500 allowance, dividends are taxed at rates that depend on which Income Tax band they fall into:

The crucial point: dividends sit on top of your other income. So your salary and any other earnings are counted first, and your dividends are taxed at the rate for whatever band they then fall into. A small salary plus dividends often keeps most of the dividends in the lower 8.75% band.

Our free dividend tax calculator works out the tax on your dividends instantly based on your other income.

A quick example

Say you’re a director who takes a £12,570 salary (using your personal allowance) and £40,000 in dividends in 2025/26:

• First £500 of dividends — tax-free (allowance)
• The rest is taxed at 8.75% up to the basic-rate limit, then 33.75% above it

The exact figure depends on the thresholds, but the structure is always the same: allowance first, then 8.75%, then 33.75%, then 39.35%.

How you pay it

Dividend tax is collected through Self Assessment. You report your dividends on your tax return and pay by 31 January. The dividends themselves must be properly declared and documented (board minutes and dividend vouchers) — paperwork that matters if HMRC ever asks.

Paying yourself efficiently

Dividend tax is only half the picture — the real question for directors is the best mix of salary and dividends. Salary is a company expense and builds your State Pension; dividends avoid National Insurance and are taxed lower. The optimal split depends on your profits and circumstances, which we cover in director’s salary and dividends.

Getting this right can save a meaningful amount each year. Our tax planning service and accountants for limited companies work out the most efficient way for you to take your profit — and handle all the paperwork.