UK dividend tax 2026/27: rates, allowance, and how directors should take income

What is dividend tax, and do you pay it?

Dividend tax is income tax on dividends. These are payments a company makes to shareholders out of profits that have already had Corporation Tax. You pay dividend tax if your dividends go over the £500 allowance and are not covered by your personal allowance or sheltered from tax.

Dividends from shares held in an ISA are tax-free and do not use your dividend allowance. Dividends inside a pension are not taxed while they remain in the pension.

UK dividend tax rates 2026/27

Dividends are taxed at lower rates than salary income, which is why most owner-managed limited companies pay their directors a mix of salary and dividends. For 2026/27, the headline rates are:

The bands are based on your total income, not just dividends. So dividends are stacked on top of salary, pension, rental income and other taxable receipts when working out which band each slice falls in.

How the £500 dividend allowance works

Every UK taxpayer has a £500 dividend allowance each tax year. Dividends within that allowance attract 0% dividend tax. It is not the same as the personal allowance (£12,570), it is on top.

One useful planning quirk: the dividend allowance still uses up basic rate band. So if you have £49,500 of salary and £1,000 of dividends, the first £500 of dividends is tax-free but it still counts toward the £50,270 higher rate threshold. The next £500 falls partly in the basic rate band (£270 at 10.75%) and partly in the higher rate band (£230 at 35.75%). The allowance is a tax-free zone, not a band- shifting one.

The allowance has been cut sharply in recent years (from £5,000 in 2017/18, to £2,000, to £1,000, and now to £500), which is why dividend extraction is less attractive than it used to be, although still better than salary in most cases.

How much dividend income is tax-free?

If dividends are your only income, your £12,570 personal allowance covers dividends first, followed by the £500 dividend allowance. This means up to £13,070 of dividends can be tax-free in 2026/27.

If salary already uses your personal allowance, only £500 of dividends is tax-free. Directors commonly take a £12,570 salary, which uses the personal allowance, so only the £500 dividend allowance is left for dividends. Your personal allowance tapers away above £100,000 of adjusted net income.

Dividend tax rates by year

From 6 April 2026 the basic and higher dividend rates rose by 2 percentage points. The additional rate stayed at 39.35%. See the GOV.UK guidance on tax on dividends.

Worked example: director on £12,570 salary + £40,000 dividends

This is one of the most common limited company director structures: a small salary equal to the personal allowance, plus dividends to top up to the desired income. The maths for 2026/27:

• Salary: £12,570 (all covered by personal allowance, £0 tax)
• Employee NI on salary: nil (salary is not above the primary threshold)
• Total income: £52,570 (£12,570 salary + £40,000 dividends)
• Dividends in tax-free allowance: £500 (0% rate: £0)
• Dividends in basic rate band: £37,200 (at 10.75% = £3,999)
• Dividends in higher rate band: £2,300 (at 35.75% = £822)
• Total personal tax: £4,821
• Take-home from £52,570 gross: £47,749

By comparison, an employee on £52,570 of salary pays around £8,460 income tax plus around £3,062 NI. Total deductions: £11,522. Take-home: about £41,048. The director keeps around £6,700 more on the same gross.

Note: this is the personal tax position only. The company has already paid corporation tax (around 19%) on the underlying profit before any dividend was declared. The combined tax (corporation tax + dividend tax) lands at roughly 28% for a basic rate director, before any employer NI on the employee route is taken into account, so the structural advantage is smaller than the headline take-home gap suggests. Still positive, especially as profits grow.

Salary vs dividends, the structural mechanics

The standard director strategy works because four things interact:

1. Salary is deductible against corporation tax. A £12,570 salary reduces taxable profit by £12,570 and saves the company around £2,388 in corporation tax (at 19%).
2. Salary uses your personal allowance. The first £12,570 of any income is income-tax-free, so taking it as salary 'banks' the allowance against zero-rate tax.
3. A £12,570 salary is above the employer NI threshold. For 2026/27 secondary NI starts at £5,000, so there is a small employer NI cost (~£1,136) on a £12,570 salary; this is usually offset by the Employment Allowance for companies with more than one director or any other employees.
4. Dividends are not subject to NI. No Class 1 primary (you pay 0%), no employer NI (the company pays 0%).

So the salary slice does three useful things and the dividend slice avoids NI entirely. The optimal split shifts with corporation tax rates and Employment Allowance eligibility, so we re-model it for each client each year.

Take-home pay comparison at different director income levels

Assuming the standard £12,570 salary + dividends top-up structure, and an owner-managed company with profits subject to the small profits rate (19%):

Compare these to the equivalent salary-only take-home in our take-home pay article. The dividend route comes out ahead at every income level, with the gap widening as you go up.

The £100,000 trap still applies to dividend takers

The personal allowance taper hits dividend income the same way it hits salary income: above £100,000 of total adjusted net income, you lose £1 of personal allowance for every £2 earned. By £125,140 it has gone.

For a director, this often comes up at the £100,000 dividends mark (£87,430 + £12,570 salary = £100,000 total). At that point, every extra £1 of dividends costs roughly:

• 35.75 pence of dividend tax (the higher-rate dividend rate)
• Plus 10 pence because the £0.50 of lost personal allowance was sheltering salary that now gets taxed at 20% basic rate
• Combined effective marginal rate: roughly 45.75% on personal income, on top of the 19% corporation tax already paid at the company level

Pension contributions reduce adjusted net income for taper purposes and are usually the cleanest way around this. Pension contributions from the company are deductible against corporation tax and do not count toward your personal income at all, so they can be a powerful tool for directors heading toward £100,000.

When dividends do NOT beat salary

The dividend route is the default for most owner-managed companies, but there are situations where pulling extra salary makes more sense:

• Pension contribution capacity. Pension contributions are capped at the lower of £60,000 or your relevant UK earnings (salary, not dividends). If you want to contribute more than £60,000 to a pension, you may need extra salary.
• Mortgage applications. Some lenders only count salary, not dividends, particularly for newer companies. A larger salary makes the affordability number look better.
• Maternity / paternity pay. Statutory payments are based on salary, not dividends.
• Director's loan account in debit. If you have already drawn cash that needs to be cleared, additional salary is sometimes the cleanest way to do it.

Reporting and paying dividend tax

If you are a UK shareholder, you report dividend income through Self Assessment. The deadlines are the same as any other SA income:

• 31 January following the tax year: filing + payment
• 31 July: second payment on account if applicable

Practical reminders:

• Issue a dividend voucher each time you pay yourself, even if you are the only shareholder. The voucher shows the dividend amount and the date. Companies House and HMRC both expect the paperwork.
• Only declare dividends from distributable reserves. If your retained earnings are insufficient, the dividend is technically unlawful and HMRC may treat it as a director's loan instead, with separate tax consequences.
• Hold a board minute for each dividend declaration. For sole-director companies this can be a simple file note, but it does need to exist.

Our year-end accounts service handles all of this paperwork for our limited company clients, including the modelling of optimal salary vs dividend ratios each year.

Tax on dividends calculator

To estimate your dividend tax, add your salary and other income, then add dividends on top. Account for any unused personal allowance, take off the £500 dividend allowance and apply the rate for the band each remaining slice falls in. The dividend allowance still uses up part of your tax band.

Use our salary and dividend optimiser to estimate your director's income split, or read how dividends are taxed, step by step.

Official source

GOV.UK: Tax on dividends