What are dividends?
Dividends are payments made by a company to its shareholders from after-tax profits. If you own shares in a company — whether through an investment account, a fund, or your own limited company — you may receive dividends.
Dividends are taxed differently from salary or interest income. They have their own rates and their own allowance, and they sit on top of your other income when calculating which rate band applies.
Work out your dividend tax bill for 2025–26 in seconds.
Calculate dividend tax →The £500 dividend allowance
In 2025–26, the first £500 of dividend income you receive is free from dividend tax. This is called the dividend allowance. It applies regardless of which income tax band you're in.
The allowance has been steadily cut: it was £5,000 in 2017–18, then £2,000 from 2018–23, then £1,000 in 2023–24, and £500 since April 2024. The reduction has hit company owner-directors particularly hard.
Important: dividends inside an ISA do not count towards your £500 allowance and are completely tax-free.
Dividend tax rates 2025–26
| Tax band | Taxable income from all sources | Dividend tax rate |
|---|---|---|
| Dividend allowance | First £500 of dividends | 0% |
| Basic rate | Up to £50,270 total income | 8.75% |
| Higher rate | £50,271 – £125,140 | 33.75% |
| Additional rate | Over £125,140 | 39.35% |
These rates are lower than the equivalent income tax rates (20%, 40%, 45%) because dividends are paid from company profits that have already been subject to corporation tax. HMRC's view is that some of the tax has already been collected at the company level.
How dividends interact with income tax
Dividends are added on top of your other income (salary, pension, rental income) when working out which tax band they fall into. The sequence is:
- First, your non-dividend income fills the personal allowance and the tax bands.
- Then, your dividend income (after the £500 allowance) sits on top of that.
- The band your dividends land in determines which dividend rate applies.
Example: you earn £40,000 salary and receive £6,000 dividends. After the £500 allowance, you have £5,500 of taxable dividends. Your salary occupies the basic-rate band up to £50,270. Your dividends sit inside the basic-rate band too, so they're taxed at 8.75%. Dividend tax on £5,500 = £481.25.
If your salary were £48,000 instead, only £2,270 of dividends would be in the basic-rate band; the remaining £3,230 would spill into the higher-rate band and be taxed at 33.75%.
Company directors and dividends
Many owner-directors of small limited companies pay themselves a low salary (typically up to the NI secondary threshold, around £9,100 in 2025–26) and then draw additional income as dividends to reduce their overall tax and NI bill. This strategy is legitimate and widely used, but the economics have tightened considerably as the dividend allowance fell and corporation tax rose to 25% for profits above £250,000.
For a basic-rate director, combined corporation tax (19–25%) plus dividend tax (8.75%) is still lower than the equivalent salary cost including employer and employee NI plus income tax. For higher-rate directors, the advantage is smaller but still usually exists.
If you're a company director, it's worth recalculating your optimal salary/dividend split each year — the right answer changes as rates and thresholds change.
Reporting and paying dividend tax
If your dividends are entirely within the £500 allowance, you don't need to report them. If your total dividends exceed £10,000, you must register for and file a Self Assessment tax return. If they're between £500 and £10,000, you have two options:
- Contact HMRC and ask them to adjust your tax code so the dividend tax is collected through PAYE (if you're employed).
- File a Self Assessment return.
Dividend tax for a given tax year is due by 31 January the following year (the same deadline as Self Assessment). There's no PAYE mechanism for dividends — they're always either collected through an adjusted tax code or via Self Assessment.
How to reduce dividend tax
There are a few legitimate ways to reduce the amount of dividend tax you pay:
Hold shares in a Stocks & Shares ISA. Dividends inside an ISA are completely tax-free and don't use up your £500 allowance. For regular investors, moving shares into an ISA over time (subject to the £20,000 annual contribution limit) is one of the most effective strategies.
Use your spouse or partner's allowances. If your partner is a basic-rate taxpayer or non-taxpayer, they have their own £500 dividend allowance and pay dividend tax at 8.75% instead of your 33.75%. Transferring shares into their name (a genuine transfer, not a paper exercise) can reduce your combined tax bill.
Pension contributions. Additional pension contributions reduce your adjusted net income, which can shift dividends from the higher-rate band back into the basic-rate band — or restore a personal allowance that's being tapered above £100,000.
Time your dividends. If you're a company director, consider the timing of dividend payments — taking dividends just before or just after 5 April can shift them into the year with the lower tax position.