Dividend Tax Rates 2025/26 and Your Personal Savings Allowance

The dividend tax rates for 2025/26 are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. The dividend allowance has dropped to £500, down from £1,000 in 2024/25 and £2,000 in 2022/23.

Most articles simply list these rates and stop. But there is a specific scenario that catches many directors out: when dividend income pushes your total income across a tax band boundary, it does not just increase the tax on those dividends. It also reduces or eliminates your Personal Savings Allowance (PSA). That means you pay more tax on your savings interest too.

This article models exactly how that works, with real numbers for 2025/26. We are ICAEW qualified accountants at Holloway Davies, and we see this every tax season. If you take dividends from your limited company and also earn bank or building society interest, read this carefully.

Dividend Tax Rates 2025/26: The Core Numbers

Here are the rates that apply for the 2025/26 tax year. These are the same rates that applied in 2024/25.

• Dividend allowance: £500. The first £500 of dividend income is tax-free.
• Basic rate (income up to £50,270): 8.75% on dividends above the allowance.
• Higher rate (income from £50,271 to £125,140): 33.75% on dividends above the allowance.
• Additional rate (income above £125,140): 39.35% on dividends above the allowance.

Remember that your dividend income is added to your other income (salary, self-employment profits, rental income, pension) to determine which tax band applies. The dividend allowance sits on top of your other allowances, so it is the last slice of income to be taxed.

The Personal Savings Allowance in 2025/26

The Personal Savings Allowance lets you earn a certain amount of savings interest tax-free. The amount depends on your tax band.

• Basic rate taxpayers: £1,000 PSA.
• Higher rate taxpayers: £500 PSA.
• Additional rate taxpayers: £0 PSA.

Your tax band for PSA purposes is determined by your total income, including dividends and savings interest, before any allowances are deducted. This is the critical point. If your dividend income pushes your total income from basic rate into higher rate, your PSA halves from £1,000 to £500. If it pushes you into additional rate, your PSA disappears entirely.

The Scenario That Costs Directors More Than Expected

Consider a director of a limited company in Birmingham. She pays herself a salary of £12,570 (the personal allowance threshold) and takes dividends from the company. She also has £1,200 of bank interest from savings accounts.

She plans to take £40,000 in dividends for the year. She thinks: "£40,000 in dividends, minus the £500 allowance, leaves £39,500 taxed at 8.75%. That is £3,456.25 in tax. Fine."

But here is what actually happens.

Step 1: Calculate total income for banding

Her total income is £12,570 (salary) plus £40,000 (dividends) plus £1,200 (savings interest) equals £53,770.

The basic rate band runs to £50,270. Her total income of £53,770 exceeds that by £3,500. She is a higher rate taxpayer.

Step 2: Calculate the impact on her PSA

Because she is a higher rate taxpayer, her PSA drops from £1,000 to £500. She now pays tax on £700 of her savings interest (£1,200 minus £500).

Savings interest is taxed at her marginal rate. For savings income, the starting rate for savings (0% on the first £5,000) applies if her other income is below £17,570. Her other non-savings income is £12,570 salary plus £40,000 dividends, which totals £52,570. That is well above £17,570, so the starting rate for savings does not apply.

She pays 20% basic rate on the first £700 of savings interest above the PSA, then 40% on any further interest. With £700 above the PSA, she pays £700 at 20% = £140. But wait: her total income of £53,770 means the first £700 of savings interest above the PSA falls within the basic rate band. So £140 is correct.

Step 3: Calculate the dividend tax correctly

Her salary of £12,570 uses her personal allowance. The dividend allowance of £500 is separate. Her dividend income is £40,000. The first £500 is tax-free. The remaining £39,500 is taxed at the dividend rates.

But which dividend rate applies? Her total income is £53,770. The basic rate band is £50,270. So £50,270 minus £12,570 (salary) equals £37,700 of the basic rate band is used by dividends. The remaining £39,500 minus £37,700 equals £1,800 of dividends that fall into the higher rate band.

Dividend tax calculation: £37,700 at 8.75% = £3,298.75. £1,800 at 33.75% = £607.50. Total dividend tax: £3,906.25.

Add the £140 savings interest tax. Total tax bill: £4,046.25.

She expected £3,456.25. She actually owes £4,046.25. The difference is £590. That is the combined effect of losing half her PSA and having some dividends taxed at the higher rate.

What If She Took £37,000 in Dividends Instead?

Let us run the same scenario with £37,000 in dividends instead of £40,000.

Total income: £12,570 salary + £37,000 dividends + £1,200 savings interest = £50,770.

She is still a higher rate taxpayer because £50,770 exceeds £50,270. But only just. Her PSA is still £500.

Dividend tax: £37,000 minus £500 allowance = £36,500. Basic rate band available for dividends: £50,270 minus £12,570 = £37,700. All £36,500 falls within basic rate. Tax at 8.75% = £3,193.75.

Savings interest tax: £1,200 minus £500 PSA = £700. This £700 falls within the basic rate band (total income £50,770, basic rate band £50,270, so £500 of the savings interest is at 20%, the remaining £200 is at 40%). Tax: £500 at 20% = £100, plus £200 at 40% = £80. Total savings tax: £180.

Total tax: £3,193.75 + £180 = £3,373.75.

By taking £3,000 less in dividends, she saves £672.50 in tax. Her net dividend income drops by £2,327.50 after tax, but she also avoids pushing more dividends into the higher rate band. The marginal tax rate on that last £3,000 of dividends is effectively over 22% when you factor in the PSA impact.

The Additional Rate Trap

If total income exceeds £125,140, the PSA drops to zero. Every pound of savings interest becomes taxable at 40% or 45%. And dividend tax jumps to 39.35%.

For a director in London drawing £100,000 salary and £50,000 dividends, total income of £150,000 means no PSA. The full £1,200 of savings interest (if applicable) is taxed at 45%. Dividends above the £500 allowance are taxed at 39.35%. That is £49,500 at 39.35% = £19,478.25 in dividend tax alone.

This is why careful dividend planning matters, especially for directors with multiple income streams.

Practical Steps to Manage the Dividend PSA Interaction

1. Model your total income before setting dividends

Do not just look at your salary and dividend in isolation. Include savings interest, rental income, and any other income. Use a spreadsheet or accounting software like Xero or FreeAgent to model the total.

If your total income is close to £50,270, consider reducing dividends slightly to stay within the basic rate band. The tax saved on both dividends and savings interest can be significant.

2. Use your ISA allowance fully

You can save up to £20,000 per year in a Stocks and Shares ISA or Cash ISA. Interest and gains within an ISA are tax-free and do not count towards your total income for PSA purposes. This is the simplest way to protect savings income from tax.

If you have not used your 2025/26 ISA allowance, do it before 5 April 2026.

3. Consider Premium Bonds

Premium Bond prizes are tax-free. They do not count towards your total income or affect your PSA. For directors with significant cash savings, moving money into Premium Bonds can be more tax-efficient than a standard savings account.

The limit is £50,000 per person. Prize rate varies but has been around 4% to 4.5% in recent years.

4. Time your dividends

If you have flexibility, consider taking dividends in a tax year when your other income is lower. For example, if you expect to take a career break or reduce your salary, take larger dividends that year. If you expect a bonus or large rental income, take smaller dividends that year.

5. Use a spouse's allowances

If your spouse or civil partner has unused basic rate band and PSA, consider transferring savings or issuing alphabet shares so they receive dividends instead. Each person has their own PSA and dividend allowance.

Be careful with settlement legislation if shares are gifted to anyone other than a spouse. HMRC can challenge arrangements where income is shifted to reduce tax. Spouse transfers are generally safe, but the shares must carry full voting and dividend rights.

What About Sole Traders and Partnerships?

The same principles apply if you are a sole trader or partnership owner. Your trading profits count as income for determining your tax band and PSA. If you also earn dividends from investments or a separate company, the same interaction occurs.

For sole traders approaching the higher rate threshold, reducing drawings or making additional pension contributions can keep you in the basic rate band. Pension contributions reduce your adjusted net income, which is the figure used to determine your tax band and PSA.

Using Pension Contributions to Protect Your PSA

If your total income is £53,770 (as in our first example) and you make a personal pension contribution of £3,500, your adjusted net income drops to £50,270. You become a basic rate taxpayer again. Your PSA returns to £1,000. Your dividend tax drops entirely to 8.75%.

The pension contribution itself attracts basic rate tax relief at source (20%), so you only pay £2,800 to get £3,500 into the pension. And if you are a higher rate taxpayer, you can claim additional relief through your self assessment.

This is often the most efficient way to manage the dividend-PSA interaction, especially for directors who are not yet maxing out their pension contributions.

When to Speak to an Accountant

If your total income (salary, dividends, savings interest, rental income, and any other income) is between £45,000 and £55,000, or between £120,000 and £130,000, you are in the zone where dividend income can push you across a band boundary. The tax impact is disproportionate.

We recommend running a full tax projection before setting your dividend amount for the year. Our ICAEW qualified team at Holloway Davies can help you model this. You can contact us for a consultation.

For more on dividend planning generally, see our guide on director pay and dividends. If you are considering changing your company structure, read about incorporation first.

Summary of Key Numbers for 2025/26

• Dividend allowance: £500.
• Dividend tax rates: 8.75% basic, 33.75% higher, 39.35% additional.
• Personal Savings Allowance: £1,000 basic rate, £500 higher rate, £0 additional rate.
• Basic rate band: £0 to £50,270.
• Higher rate band: £50,271 to £125,140.
• Additional rate: above £125,140.
• ISA allowance: £20,000 per year.
• Pension annual allowance: £60,000 (tapered for high earners).

The dividend tax rates 2025/26 are not new, but the interaction with the PSA is poorly understood. If you take dividends and earn savings interest, model your total income before you decide how much to draw. A few hundred pounds of dividends can cost you thousands in unexpected tax.