What Are the Dividend Tax Rates for 2025/26?
The dividend tax rates for 2025/26 are unchanged from the previous year. You pay tax on dividends above the £500 allowance at the same rate as the income tax band your total income falls into:
- Basic rate (8.75%) - applies if your total taxable income is between £12,571 and £50,270.
- Higher rate (33.75%) - applies if your total taxable income is between £50,271 and £125,140.
- Additional rate (39.35%) - applies if your total taxable income exceeds £125,140.
These rates apply to dividends received from UK companies, including your own limited company. The rates are lower than the equivalent income tax rates on salary (20%, 40%, 45%) because dividends are paid from profits that have already been subject to corporation tax.
If you are a director of a small limited company, these rates directly affect how much you take home after tax. Getting the mix right between salary and dividends is the single biggest tax planning decision you will make each year.
The £500 Dividend Allowance for 2025/26
The dividend allowance for 2025/26 is £500. This is the amount of dividend income you can receive each year without paying any dividend tax. It is not a tax-free allowance in the same way as the personal allowance. It is a zero-rate band. Any dividends you receive above £500 are taxed at the rates above.
The allowance has dropped sharply in recent years. It was £5,000 in 2016/17, then £2,000 from 2018/19, then £1,000 in 2023/24, and finally £500 from 2024/25. For 2025/26, it stays at £500.
This means if you are a director taking a small amount of dividends each year, you now pay tax on every pound above £500. For a basic rate taxpayer, that is 8.75p per pound. For a higher rate taxpayer, it is 33.75p per pound.
How Dividend Tax Works in Practice
Dividends are treated as the top slice of your income. You add your total dividend income to your other income (salary, rental income, savings interest, etc.) and then work out which tax band the dividends fall into. The dividend allowance sits within the basic rate band, but it is not part of your personal allowance.
Here is a worked example. Say you are a director of a Manchester-based consultancy. You pay yourself a salary of £12,570 (which uses your personal allowance) and take dividends of £40,000. Your total income is £52,570. The first £12,570 is tax-free (salary). The next £500 of dividends is tax-free (dividend allowance). That leaves £39,500 of dividends to tax. The basic rate band runs from £12,571 to £50,270, so £37,700 of your dividends fall into the basic rate band. The remaining £1,800 falls into the higher rate band. Your dividend tax bill is £37,700 at 8.75% (£3,298.75) plus £1,800 at 33.75% (£607.50). Total dividend tax: £3,906.25.
If you took the same dividends but paid yourself no salary, your total income would be £40,000. The first £12,570 is covered by the personal allowance. The next £500 is the dividend allowance. That leaves £26,930 of dividends taxed at 8.75%, giving a dividend tax bill of £2,356.38. Lower total tax, but you lose the benefit of National Insurance credits for state pension and you have no salary to count as deductible against company profits.
Dividend Tax vs Salary: Which Is Better?
For most limited company directors, a combination of a small salary and dividends is the most tax-efficient approach. The standard structure is a salary set at the personal allowance level (£12,570) and dividends taken up to the basic rate band limit. This avoids both income tax and National Insurance on the salary, and keeps dividend tax at 8.75% on the dividend portion.
However, the £500 dividend allowance means the first £500 of dividends is tax-free. Above that, you pay dividend tax at your marginal rate. If you are a basic rate taxpayer, the combined tax burden on company profits extracted as dividends is roughly 19% corporation tax plus 8.75% dividend tax on the net profit. That works out to an effective rate of around 26% on the original profit. Compare that to extracting the same profit as salary, where you pay corporation tax (19%) plus employer NI (13.8%) plus employee NI (8% above primary threshold) plus income tax (20%). The dividend route almost always wins.
There are exceptions. If you are a sole director with no employees and your company qualifies for the Employment Allowance (£10,500), you can pay a salary up to the secondary threshold (£9,100) without employer NI. Above that, you pay 13.8%. The salary route can be better if you need to build up qualifying years for state pension or if you are close to the state pension age.
Dividend Tax for Contractors Working Through a Ltd Company
Contractors operating outside IR35 through their own limited company face the same dividend tax rates as any other director. The key difference is that contractors often have higher profit margins, meaning they take more dividends and push into the higher rate band faster.
Take a contractor in Shoreditch earning £120,000 through their Ltd company. After salary of £12,570 and expenses, the remaining profit is around £95,000 after corporation tax. If they take all of that as dividends, their total income is £107,570. The personal allowance covers £12,570. The dividend allowance covers £500. That leaves £94,500 of dividends to tax. The basic rate band covers £37,700 of that at 8.75% (£3,298.75). The higher rate band covers the remaining £56,800 at 33.75% (£19,170). Total dividend tax: £22,468.75. That is a significant chunk of the profit.
For contractors inside IR35, dividends are less relevant because the client deducts tax and NI at source. The contractor's Ltd company receives the fee net of tax, and the contractor pays themselves a salary from that. Dividends may still be taken from retained profits, but the tax position is different.
Dividend Tax for Spouse Shareholdings
Many husband-and-wife limited companies use alphabet shares to split dividend income between spouses. This can keep both partners in the basic rate band, avoiding higher rate dividend tax. For example, a couple running a Birmingham café with £80,000 of distributable profit can each take £40,000 in dividends. Each pays dividend tax at 8.75% on the amount above the £500 allowance. Total tax: roughly £6,900. If one spouse took all £80,000, they would pay higher rate tax on most of it: around £24,000 in dividend tax.
There is a catch. HMRC's settlement legislation can apply if shares are issued to a spouse purely to avoid tax. The legislation says that if the spouse receiving dividends has not genuinely contributed to the business, the dividends may be reattributed to the other spouse. The key is that both spouses must be actively involved in the business or have provided capital that contributed to the profits. Alphabet shares are legitimate if structured correctly. Our director pay and dividends guidance covers this in more detail.
Dividend Tax for Sole Traders and Partnerships
Sole traders and partnerships do not pay dividend tax. They are taxed on their business profits through self assessment at income tax rates. Dividends from investments in other companies are taxed at the same dividend rates above, but they are not a routine part of a sole trader's tax position. If you are a sole trader and you own shares in a separate company, the dividends from those shares are added to your other income and taxed at the relevant dividend rate.
If you are considering incorporating your sole trader business, the dividend tax rates for 2025/26 are a factor in that decision. The corporation tax saving (19% on profits up to £50,000) compared to income tax (20% or 40%) is attractive, but you then face dividend tax on extraction. The net benefit depends on how much profit you retain in the company versus extract. Our incorporation page walks through the full comparison.
How to Report Dividends on Your Tax Return
Dividends are reported on your self assessment tax return. If you are a director of a limited company, you include the total dividends you received in the tax year on the dividend pages of the SA100. HMRC uses this information to calculate your dividend tax liability. You do not need to send anything to HMRC at the time you declare a dividend. You just report it on your annual return.
If your only income is dividends below £10,000 and you have no other income to report, you may not need to file a return at all. But if you have dividend income above the £500 allowance, you will need to file a return to pay the tax due. The deadline is 31 January following the end of the tax year. For 2025/26, that means filing by 31 January 2027.
If you are a higher rate taxpayer and your dividend income is significant, you may need to make payments on account. These are half-yearly payments towards the following year's tax bill. The first payment is due on 31 January, the second on 31 July.
Dividend Tax Planning for 2025/26
Here are the practical steps you can take now to manage your dividend tax position:
- Use the £500 allowance fully. If you are a basic rate taxpayer, taking £500 in dividends costs you nothing. If you are a higher rate taxpayer, it still costs nothing. Do not leave it unused.
- Keep dividends within the basic rate band. Once your total income (including dividends) exceeds £50,270, every extra pound of dividend costs 33.75% in tax. That is a steep jump from 8.75%. If you have retained profits in the company, consider taking them in stages over multiple tax years to stay within the basic rate band each year.
- Consider a pension contribution. A company pension contribution reduces your company's profits (saving corporation tax) and is not treated as income for you personally. It can keep your total income below the higher rate threshold, reducing the dividend tax you pay on the dividends you do take.
- Review your spouse shareholding. If your spouse is a shareholder and genuinely involved in the business, splitting dividends can save significant tax. Make sure the share structure is documented properly with alphabet shares or a separate class of shares.
- Plan for the 2026/27 changes. The dividend allowance is confirmed at £500 for 2025/26, but no further cuts have been announced. The rates are also unchanged. However, the government reviews these annually. Keep an eye on the Autumn Budget for any changes.
If your company has retained profits of £100,000 or more, the dividend tax rates for 2025/26 mean that extracting those profits in one go will cost you 33.75% or 39.35% on most of the amount. That is a heavy tax bill. Spreading the extraction over several years, combined with pension contributions, can reduce the effective rate significantly.
Dividend Tax and Corporation Tax Interaction
Dividends are paid from post-tax profits. Your company pays corporation tax on its profits at 19% (up to £50,000) or 25% (above £250,000), with marginal relief in between. The profit left after corporation tax is available to distribute as dividends. You then pay dividend tax personally on the dividends you receive.
This double layer of tax is the reason dividend tax rates are lower than income tax rates. The government does not want to tax the same pound twice at full rates. Even so, the combined effective rate on company profits extracted as dividends is roughly:
- 19% corporation tax + 8.75% dividend tax on the net = 26% effective rate (basic rate taxpayer)
- 19% corporation tax + 33.75% dividend tax on the net = 46% effective rate (higher rate taxpayer)
- 25% corporation tax + 33.75% dividend tax on the net = 50% effective rate (higher rate taxpayer, above £250k profits)
If your company pays corporation tax at 25%, the combined rate is higher. That makes the case for keeping profits within the company stronger, but you then face the question of what to do with retained cash. Reinvesting in the business, buying equipment, or funding R&D can be better than extracting and paying high personal tax.
For companies doing R&D tax credits, the interaction is different. R&D credits reduce your corporation tax bill or generate a cash payment. The dividend you take from the remaining profit is still subject to dividend tax at your personal rate.
Dividend Tax for Non-UK Residents
If you are a UK resident, you pay UK dividend tax on worldwide dividends. If you are non-UK resident, you pay UK dividend tax only on dividends from UK companies. The rates are the same. However, if you live in a country with a double taxation agreement with the UK, you may be able to claim relief to avoid paying tax twice on the same dividend.
If you are a director of a UK limited company but live abroad, your dividend tax position depends on your residency status. HMRC uses the statutory residence test to determine this. If you are non-resident, you do not pay UK tax on dividends from your company. You pay tax in your country of residence instead. This is a common structure for contractors who move abroad but keep their UK company running.