The Step-by-Step Guide to Dividend Tax in 2025/26

If you’re a shareholder in a limited company, dividends are one of the most tax-efficient ways of paying yourself. But with changing tax bands, allowances, and reporting requirements, understanding dividend tax in 2025/26 is essential.

This guide walks you through everything you need to know: what dividends are, who can receive them, how dividend allowances work, the 2025/26 dividend tax rates, and whether it’s better to pay yourself via salary or dividends or a mix of both.

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What is a Dividend?

A dividend is a payment a limited company makes to its shareholders from profits left over after paying Corporation Tax.

Key points:

• A company can only pay dividends from current or retained profits.

• The total dividend distribution cannot exceed the company’s available profits.

• Dividends are not subject to National Insurance Contributions (NICs).

Because dividends attract lower tax rates than salaries, they are a popular way for directors to extract profits tax-efficiently.

Who Can Receive a Dividend Payment?

Dividends are distributed to shareholders in proportion to the number (and sometimes class) of shares they own.

• Shareholders can be directors, employees, investors, or even family members.

• Being a shareholder does not automatically make you a director.

• In smaller companies, it’s common for directors to also hold shares and pay themselves both salary and dividends.

  
  

How Much Tax Will I Pay on Dividends?

The amount of dividend tax you pay depends on:

1. Your total taxable income for the year.

2. How much of that income comes specifically from dividends.

✅ Good news: No National Insurance is payable on dividends.

This is why many limited company directors use a combination of a small salary plus dividends—it balances tax efficiency with access to allowances like the State Pension.

(See our Guide to Tax-Efficient Director’s Salaries for more detail.)

What Tax-Free Allowances Apply to Dividends?

Two allowances can reduce your dividend tax bill:

1. Personal Allowance 2025/26

• Amount: £12,570.

• Applies across all types of income (salary, self-employment, dividends, etc.).

• If your only income is a dividend of £10,000, you pay no tax because it’s within your personal allowance.

2. Dividend Allowance 2025/26

• Amount: £500.

• Applies only to dividends.

• It’s separate from the personal allowance and can be used in addition to it.

Example 1 – Using Both Allowances

• You receive a dividend of £13,070 as your only income.

• £12,570 is covered by your Personal Allowance.

• £500 is covered by your Dividend Allowance.

• ✅ No dividend tax to pay.

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Example 2 – Salary Plus Dividend

• Salary: £10,000.

• Dividend: £5,000.

• £10,000 of your Personal Allowance used by salary.

• £2,570 of your allowance left to offset dividend income.

• Dividend remaining after allowance: £2,430.

• Subtract £500 Dividend Allowance = £1,930 taxable dividend income.

Dividend Tax Rates 2025/26

Dividend income is taxed in bands, depending on your total income (salary + dividends + other income).

Band	Threshold 2025/26	Dividend Tax Rate
Personal Allowance	£0 – £12,570	0%
Basic Rate	£12,571 – £50,270	8.75%
Higher Rate	£50,271 – £125,140	33.75%
Additional Rate	£125,140+	39.35%

When and How to Pay Yourself Dividends

You can pay dividends as frequently as you wish (monthly, quarterly, annually) provided the company has sufficient profits.

Legal requirements:

• Hold a directors’ meeting to declare dividends (even if you’re the only director).

• Record the meeting in official minutes.

• Issue a dividend voucher with:

  Company name and date.

  Shareholder’s name.

  Dividend amount.

How and When to Pay Dividend Tax

Unlike PAYE salary tax, dividend tax isn’t deducted automatically. You pay it through Self Assessment:

• Declare all dividend income on your tax return.

• HMRC will calculate the dividend tax due based on your total income and allowances.

• Tax is normally payable by 31st January following the end of the tax year.

Salary vs Dividends – Which is Best?

For directors who are also shareholders, the most tax-efficient strategy is often:

• Take a small salary (usually up to the NIC threshold).

• Top up with dividends.

This approach:

• Keeps NIC liability low.

• Preserves entitlement to State Pension and benefits.

• Maximises use of both the Personal Allowance and Dividend Allowance.

If you have multiple shareholders, directors, or other sources of income, the calculation becomes more complex - speak to an accountant to find the right balance for you.

Final Thoughts

Dividends remain one of the most tax-efficient ways to take money out of your limited company. But with the Dividend Allowance cut to £500 from 2025/26, more company directors and shareholders will find themselves paying tax on their dividend income.

Planning ahead, using allowances properly, and balancing salary with dividends can help you minimise your tax bill and stay compliant with HMRC.

Q1: What is the dividend allowance for 2025/26?

The dividend allowance for 2025/26 is £500, meaning the first £500 of dividend income is tax-free.

Q2: Do I pay National Insurance on dividends?

No. Dividend income is not subject to National Insurance Contributions, making it more tax-efficient than salary.

Q3: When is dividend tax due for 2025/26?

Dividend tax is reported via your Self Assessment tax return and must be paid by 31st January following the end of the tax year.

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