If you take dividends from your limited company, the first £500 each year is covered by the dividend allowance and carries no tax. Above that, dividends are taxed at 8.75% in the basic rate band, 33.75% in the higher rate band and 39.35% in the additional rate band for 2025/26. From 6 April 2026 the basic and higher rates rise by two percentage points to 10.75% and 35.75%, while the additional rate stays at 39.35%. You report dividends through Self Assessment.
Dividends are one of the main ways company directors and shareholders take money out of a business, and they are taxed differently from salary. This guide explains the dividend allowance, the rates that apply for the 2025/26 and 2026/27 tax years, and how the tax reaches HMRC. It covers the tax side only. For the paperwork that makes a dividend valid, such as board minutes and vouchers, see our guide on how to pay dividends legally. This page is part of our wider accountancy and tax guide.
What is the dividend allowance?
The dividend allowance is a slice of dividend income you can receive each tax year without paying dividend tax on it. For both 2025/26 and 2026/27 the allowance is £500. Every individual gets it, whatever their income tax band, and it applies on top of your personal allowance. It is not a deduction from your bill; it is a zero rate band, so dividends that fall inside it still count when working out which band your other income sits in.
The allowance has fallen sharply in recent years, from £2,000 down to £1,000 and then to its current £500. That means more small shareholders now have tax to pay on modest dividends than was the case a few years ago.
What are the dividend tax rates for 2025/26 and 2026/27?
Dividends above the allowance are taxed at their own rates, which are lower than the equivalent rates on salary. The rate you pay depends on the income tax band the dividend falls into once it is added to your other income.
For the 2025/26 tax year the rates are:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
For the 2026/27 tax year, following the increase that takes effect on 6 April 2026, the rates are:
- Basic rate: 10.75%
- Higher rate: 35.75%
- Additional rate: 39.35%
So the basic and higher rates each rise by two percentage points from April 2026, while the additional rate is unchanged. If you are planning dividend levels across the two years, it is worth knowing that a dividend taken before 6 April 2026 is taxed at the older, lower rates.
How do dividends fit with the rest of your income?
Dividends are treated as the top slice of your income. HMRC stacks your income in a set order: earnings and pensions first, then savings interest, then dividends. This matters because the dividend rate is set by the band your dividends reach once everything else has been counted.
You do not pay tax on any dividend income that falls within your personal allowance, which is £12,570 for both years. If your only income is dividends, you can therefore receive a good deal before any tax is due: the personal allowance, then the £500 dividend allowance, before the basic rate begins. For a director drawing a small salary and topping up with dividends, the salary usually fills part of the personal allowance first, so the dividends start being taxed sooner.
Are dividends more tax efficient than salary?
Dividends carry lower headline rates than salary and are free of National Insurance, which is why many directors favour them. The picture is not that simple, though, because dividends are paid out of profit that has already borne corporation tax, whereas salary is a deductible cost for the company. The right mix depends on your profit, your other income and your pension plans. We compare the two approaches in detail in salary versus dividends for a limited company, and you can read how the company side works in corporation tax explained.
How do you report and pay dividend tax?
If your dividends are within the £500 allowance, you have nothing to report. Above that, you must tell HMRC every year that you have tax to pay.
Where your dividend income is £10,000 or less, you can either report it on a Self Assessment tax return or ask HMRC to collect the tax by adjusting your tax code, so it comes out of your wages or pension. Where your dividend income is more than £10,000, you must complete a Self Assessment tax return. If you do not already file one, register with HMRC by 5 October after the end of the tax year in which you received the dividends.
The tax is then due through the Self Assessment timetable, normally by 31 January following the tax year. Missing that date brings penalties and interest, so it pays to plan ahead. Our guide to Self Assessment deadlines and penalties sets out the dates and what happens if you are late.
Protect yourself against an enquiry
Dividend and director income is an area HMRC looks at closely, and even a correct return can trigger questions. Solar Protect tax investigation insurance covers up to £100,000 of your accountant’s fees with no excess, so professional representation is one less thing to worry about if HMRC opens an enquiry. Get a quote to see how affordable that peace of mind is.
Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.