Dividends are payments made by a company to its shareholders from post-tax profits. They are a common way for company owners and investors to receive income.
Who pays dividend tax?
You pay dividend tax if:
- You receive dividends from shares in companies (including your own limited company)
- Your total dividend income exceeds the dividend allowance
The tax-free dividend allowance is £500 (2025-26). This means the first £500 of dividend income is tax-free, regardless of your other income (only applies to UK tax residents). Dividends are then taxed follows:
| Tax Band |
Income Range |
Dividend Tax Rate |
| Basic Rate |
£12,571 – £50,270 |
8.75% |
| Higher Rate |
£50,271 – £125,140 |
33.75% |
| Additional Rate |
Over £125,140 |
39.35% |
Note: These rates apply after your Personal Allowance (£12,570) and the £500 dividend allowance.
The dividend tax will be calculated as part of your self-assessment when your personal tax return is prepared. The dividend tax will be payable as part of self-assessment personal tax.
Dividends or salary?
For owner-managed businesses, it used to be the case that taking a small salary and then withdrawing remaining funds as dividends was the most optimal form of profit extraction. However recent changes including the increasing of corporation tax rates, reduction in employees National Insurance and changes to employers National Insurance have made the picture more complex. The tax savings between salary and dividends have narrowed, and the optimal approach now depends more heavily on individual circumstances.
It is important to note that to pay dividends there must be available reserves in the company. This is not the case for salary payments.
We can of course review this with you and advise on how to best structure this.
Making the most of your tax bands
It makes sense to make the most of your basic rate band each tax year. If you can use up your basic rate band across tax two years, rather than going into higher rate in one period, you will save significant tax. This may mean waiting to vote a dividend until the next tax year, or making sure you use up any remaining basic rate band before the end of the tax year. For this purpose, we are talking about the personal tax year ending 5 April, not the end of the company’s accounting period.
We contact our clients prior to the end of the tax year to discuss how best to utilise remaining tax bands and allowances.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
