UK Dividend Tax Explained: 2025/26

Rates & Allowance for 2025/26

The dividend allowance is not a separate band — it just means the first £500 of dividend income is taxed at 0%. It still uses up part of whichever band it falls in.

How Dividends Stack with Other Income

HMRC taxes income in this order: non-savings income → savings → dividends. Dividends sit on top, so the rate you pay depends on what band they fall into after your salary or pension is taxed.

You still get the £12,570 personal allowance — and if all your income is dividends, the first £12,570 + £500 = £13,070 is effectively tax-free in 2025/26.

Worked Example: Shareholder with Salary

Priya is employed earning £45,000 and receives £8,000 in dividends from shares held outside an ISA.

• Salary uses personal allowance + most of basic-rate band: taxable salary = £32,430
• Remaining basic-rate band before £50,270: £5,270
• Dividend allowance: £500 at 0%
• Next £5,270 of dividends at 8.75% = £461.13
• Remaining £2,230 of dividends at 33.75% (higher rate) = £752.63
• Total dividend tax: £1,213.76

Effective rate on her £8,000 dividends: 15.2%. She pays Income Tax + NI on the salary as normal.

Salary vs Dividend for Directors

Limited company directors who own their company can choose how to extract profits. The classic setup for 2025/26 is:

1. Small salary — often £12,570 (personal allowance) or £9,100 (employer's NI secondary threshold)
2. Dividends for the balance

Why? Three reasons:

• Salary is tax-deductible against Corporation Tax (saving 19% or 25%)
• Dividends save employer NI — which rose to 15% with a £5,000 secondary threshold in April 2025
• Employees with no NI lose State Pension qualifying years — a £12,570 salary preserves them via Class 1 credits

But: dividends are paid from post-tax profits. So compare the combined rate: Corporation Tax + dividend tax. For a higher-rate director taking £40,000 of dividends from a company paying 25% CT, the effective combined rate is roughly 50.3%. Salary at 40% IT + 2% employee NI + 15% employer NI works out higher in most scenarios — but the right answer depends on your profits, other income and pension contributions. Always model it for your specific case.

Dividend Vouchers & Records

Under the Companies Act 2006 every dividend payment must be supported by a dividend voucher showing:

• Company name and registered number
• Shareholder name(s)
• Date of payment
• Amount of dividend per share and total
• Share class

You also need board minutes declaring each dividend, with a clear distinction between interim dividends (paid by board resolution) and final dividends (approved by members). HMRC may reclassify undocumented dividends as salary — triggering PAYE and NI.

Reporting Dividends to HMRC

• Under £500 — within the allowance, no tax, no reporting
• £500 – £10,000 — tell HMRC via your Personal Tax Account; they can adjust your PAYE code or issue a Simple Assessment
• Over £10,000 — Self-Assessment is required, file SA100 by 31 January

Dividends inside an ISA, SIPP or pension are tax-free and don't need reporting at all. The same applies to dividends from VCTs (up to £200,000 investment per year) and EIS shares held more than three years.

Common Mistakes to Avoid

• Paying dividends when the company has no distributable profits — these are illegal and HMRC can reclassify them as salary or loans (s455 tax applies)
• Backdating dividend paperwork to fit accounts — HMRC actively challenges this
• Ignoring the £10,000 Self-Assessment threshold
• Forgetting that the allowance dropped to £500 — many investors only owed nothing under the old £2,000 rule
• Mixing salary and dividend records — keep separate documentation for each

FAQs