Dividends are payments made by companies to their shareholders from after-tax profits. In the UK, dividends are taxed separately from other income — at lower rates than salary — making them attractive for company directors, investors, and those with a personal limited company.
Dividend Tax Rates 2025/26
| Tax Band | Dividend Rate |
|---|---|
| Basic Rate (up to £50,270) | 8.75% |
| Higher Rate (£50,271 – £125,140) | 33.75% |
| Additional Rate (over £125,140) | 39.35% |
These rates are significantly lower than the equivalent income tax rates (20%, 40%, 45%), which is why many limited company contractors and owner-managers pay themselves via a mix of a small salary and dividends.
The Dividend Allowance
The first £500 of dividend income each tax year (2025/26) is tax-free — this is the Dividend Allowance. This allowance has been dramatically reduced over recent years:
| Year | Allowance |
|---|---|
| 2022/23 | £2,000 |
| 2023/24 | £1,000 |
| 2024/25 onwards | £500 |
The £500 allowance applies on top of the Personal Allowance (£12,570). Dividends within the allowance still use up your basic rate band.
How Dividend Tax Is Calculated
Dividends sit on top of other income when calculating which rate band applies.
Example: You earn a £12,570 salary (no income tax, as it equals the Personal Allowance) and receive £40,000 in dividends.
- £500: covered by the Dividend Allowance — no tax
- £37,200 (up to £50,270 basic rate limit): taxed at 8.75% = £3,255
- £2,300 (above £50,270): taxed at 33.75% = £776.25
- Total dividend tax: ~£4,031
This compares with roughly £12,000+ in income tax and NI had the £40,000 been taken as additional salary.
How to Pay Dividend Tax
Dividend tax is not collected via PAYE. You must report dividends over the £500 allowance via Self Assessment. If you have not filed Self Assessment before, you will need to register with HMRC.
Some investors receive small dividends from funds or shares where the gross amounts are small — if your total dividend income is less than £10,000, HMRC may allow you to report it by phone rather than a full return.
ISA Sheltering
Dividends received inside a Stocks and Shares ISA are completely exempt from dividend tax. If you hold high-yielding shares or funds, sheltering them inside your annual £20,000 ISA allowance is one of the most straightforward ways to eliminate dividend tax entirely.
Key Takeaway
Dividend tax rates are substantially lower than income tax rates, but with the allowance cut to £500, even modest investment portfolios outside an ISA will now generate a taxable dividend income. Use our dividend tax calculator to find your exact position.