UK Dividend Tax Guide (2025/26)
Understand how dividend tax works, the current rates and allowances, and how to optimise your income tax efficiently.
What Is Dividend Tax?
UK dividend tax is the tax you pay on income from company shares, such as those in your own limited company or public investments. For the 2025/26 tax year, you can earn up to £500 in dividends tax-free under the Dividend Allowance. Beyond this, dividend income is taxed at 8.75% for basic rate, 33.75% for higher rate, and 39.35% for additional rate taxpayers. Dividend income is not subject to National Insurance, making it a popular and efficient way to extract profits. You must declare dividends over £10,000 through a Self Assessment tax return.
Who Pays Dividend Tax?
You may need to pay dividend tax if you receive dividends from:
Shares you own in publicly listed companies
Shares in a private company, including your own limited company
Investment funds that distribute dividends (e.g. unit trusts or OEICs)
✅ You do not pay dividend tax if your dividends are within your personal allowance or under the dividend allowance.
Dividend Allowance and Tax-Free Thresholds (2025/26)
| Allowance Type | 2025/26 Threshold |
|---|---|
| Personal Allowance | £12,570 |
| Dividend Allowance | £500 (down from £1,000) |
📌 Important: The Dividend Allowance is a separate allowance that applies to dividend income only. You still benefit from the Personal Allowance for all types of income, including dividends.
UK Dividend Tax Rates for 2025/26
Once you exceed the combined personal and dividend allowance, you’ll pay dividend tax based on your income tax band:
| Tax Band | Total Income Range | Dividend Tax Rate |
|---|---|---|
| Basic Rate | £12,571 to £50,270 | 8.75% |
| Higher Rate | £50,271 to £125,140 | 33.75% |
| Additional Rate | Over £125,140 | 39.35% |
📉 Dividend tax rates have been frozen since the 2022/23 tax year, but the Dividend Allowance has been significantly reduced.
How Dividend Tax Is Calculated: Step-by-Step
Let’s say you earn £60,000 total income in 2025/26, including £30,000 from dividends:
First £12,570 – tax-free under Personal Allowance
Next £500 – tax-free under Dividend Allowance
Remaining £46,930 – taxed across bands
If your salary is £30,000 and dividends are £30,000:
You’ve already used your £12,570 personal allowance against salary
The first £500 of dividends is tax-free
The next £19,770 of dividend income is within the Basic Rate band and taxed at 8.75%
The remaining £9,730 is taxed at the Higher Rate of 33.75%
Declaring Dividend Income
You must report your dividend income if:
You earn more than £10,000 in dividends – submit a Self Assessment tax return
You earn up to £10,000 – contact HMRC or adjust your PAYE tax code
HMRC uses your total income from all sources to determine which dividend tax rate applies.
When Are Dividends Paid?
Companies can distribute dividends at any time, but directors must follow proper procedures, including:
Ensuring profits are available for distribution
Recording dividend declarations in board meeting minutes
Issuing dividend vouchers to shareholders
For limited company owners, dividends are often paid quarterly or annually, depending on cash flow and tax planning.
Salary vs Dividend: Which Is Better?
| Factor | Salary | Dividend |
|---|---|---|
| Subject to NIC | Yes | No |
| Corporation tax relief | Yes | No |
| Tax-free allowance | Personal allowance | Personal + Dividend allowance |
| Frequency | Monthly via payroll | Flexible |
💡 A combination of a low salary (to use personal allowance and NIC thresholds) and dividends (to optimise tax) is often the most efficient strategy for limited company directors.
Dividend Tax Planning Tips
Use ISA accounts for tax-free dividend income (up to £20,000 per year)
Split shares with a spouse to utilise two dividend allowances
Time dividend payments to stay within lower tax bands
Ensure your company has sufficient retained profits before declaring dividends
Frequently Asked Questions
Do I Pay National Insurance on Dividends?
No. Dividend income is not subject to employee or employer National Insurance Contributions (NICs).
Can I Avoid Dividend Tax?
You can reduce or avoid dividend tax by staying within the dividend allowance, investing through an ISA, or splitting income with a spouse. Tax avoidance schemes should be approached with caution.
Are Dividends Taxed Differently in a Pension or ISA?
Yes. Dividends earned within a Stocks & Shares ISA or SIPP (Self-Invested Personal Pension) are entirely tax-free.
Summary: Key Takeaways
| Point | Details |
|---|---|
| Dividend allowance (2025/26) | £500 |
| Basic rate dividend tax | 8.75% |
| Higher rate dividend tax | 33.75% |
| Additional rate dividend tax | 39.35% |
| Declaring dividend income | Required if dividends > £10,000 |
| Best tax strategy | Combine low salary + dividends + ISA usage |
Final Thoughts
Dividend tax rules can be complex — especially if you’re juggling salary, dividends, rental income or investments. Working with an experienced accountant can help ensure you make the most of your allowances and avoid costly tax bills.
If you need help planning your dividend strategy or completing your Self Assessment tax return, we’re here to help.