If you run a limited company, how you pay yourself decides how much tax you keep. Dividends are usually a big part of that decision, and the rules shifted again recently.
This guide covers the 2025/26 dividend allowance, the rate you'll pay in each band, and how a low salary plus dividends actually works in practice. We'll show the maths step by step so you can see where every pound goes.
It's written for limited company directors and shareholders in England, Wales and Northern Ireland. If you're a Scottish taxpayer, your salary is taxed on Scottish rates but your dividends are not, and we flag where that matters.
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What are dividends and how do they work?
A dividend is a share of profit that your limited company pays to its shareholders. If you own shares in your own company, it's a way of taking money out as a part-owner rather than as an employee.
Your company can only pay dividends from profit left over after all costs and taxes, including Corporation Tax. That's the crucial bit: you can't pay a dividend just because there's cash in the bank.
For the financial years starting in 2025 and 2026, Corporation Tax is 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief in between. You settle Corporation Tax on the profit first, then distribute what's left.
Most directors find the cheapest way to pay themselves is a low salary topped up with dividends. The salary uses your tax-free allowance, and dividends are taxed at lower rates than salary and carry no National Insurance.
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How does a company issue dividends legally?
Paying a dividend isn't just moving money between accounts. There's a process, and getting it right protects you if HMRC ever asks.
First, the directors hold a meeting to formally declare the dividend. Even if you're the only director, hold the meeting and keep the minutes with your company records.
For each payment, issue a dividend voucher showing:
- The date the dividend is paid
- Your company name
- The names of the shareholders receiving it
- The amount paid
Every shareholder gets a copy, and you keep one for the company. Good bookkeeping makes this routine rather than a year-end scramble, which is exactly what our bookkeeping service is for.
One rule trips people up: dividends normally have to follow shareholdings. If you own 60% of the shares, you receive 60% of each distribution. You can't just allocate dividends to whoever you like.
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What is the dividend allowance for 2025/26?
For 2025/26 you can receive £500 of dividends before any dividend tax is due. This is the dividend allowance.
It sits on top of your personal allowance, which is the amount you can earn tax-free across most income. For 2025/26 the personal allowance is £12,570. So in principle you could take £12,570 of salary plus £500 of dividends with no income tax at all.
The allowance has shrunk fast. It was £2,000 in 2022/23, £1,000 in 2023/24, and £500 from 2024/25 onwards.
One catch: the £500 still counts towards your total income when working out which band your other income falls in. It uses up part of a band even though no tax is charged on it.
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What are the dividend tax rates for 2025/26?
Once you've used your personal allowance and the £500 dividend allowance, dividends are taxed at a rate that depends on your income band.
| Band | Dividend tax rate (2025/26) | Applies to total income |
|---|---|---|
| Basic rate | 8.75% | £12,571 to £50,270 |
| Higher rate | 33.75% | £50,271 to £125,140 |
| Additional rate | 39.35% | over £125,140 |
These rates are lower than the 20%, 40% and 45% you'd pay on salary in the same bands. Add in the National Insurance saving and you can see why the salary-plus-dividends approach is so common.
If you're a Scottish taxpayer, there's a quirk worth knowing. Your salary is taxed on Scottish income tax rates, but your dividends are taxed using these UK rates and thresholds.
The main income thresholds are frozen until April 2028. As incomes rise, more people get pulled into higher bands over time even without a real pay rise, an effect known as fiscal drag.
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How much tax will you pay on dividends?
Let's work a clear example so you can see the mechanics.
Illustrative example. A director takes a salary of £12,570 (using up the personal allowance) and £50,000 of dividends in 2025/26.
The tax stacks up like this:
| Slice of income | Rate | Tax |
|---|---|---|
| First £12,570 (salary) | Personal allowance, 0% | £0.00 |
| Next £500 (dividends) | Dividend allowance, 0% | £0.00 |
| Next £37,200 (dividends) | Basic rate, 8.75% | £3,255.00 |
| Final £12,300 (dividends) | Higher rate, 33.75% | £4,151.25 |
| Total | £7,406.25 |
Here's the working. The basic rate band runs to £50,270 of total income. After £12,570 of salary and £500 of allowance, £37,200 of dividends fits inside the basic rate band (12,570 + 500 + 37,200 = £50,270). The remaining £12,300 of dividends is taxed at the higher rate.
Total income is £62,570, and the income tax is £7,406.25. That's an effective rate of about 11.8% across the whole £62,570, which is why the approach is so efficient.
Want to sanity-check your own numbers? Our dividend tax calculator runs your salary and dividends through these bands.
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What's the most you can take without higher rate tax?
A lot of directors want to take as much as possible while staying in the basic rate band, before the rate jumps to 33.75%.
Illustrative example. For 2025/26 the sweet spot is usually:
- Salary of £12,570, covered by the personal allowance, so £0 tax
- Dividends of £37,700, which brings total income to exactly £50,270
The tax works out as:
- £12,570 salary uses the personal allowance: £0
- First £500 of dividends uses the dividend allowance: £0
- Remaining £37,200 of dividends at 8.75%: £3,255
That's £3,255 of tax on £50,270 of income, leaving £47,015 after income tax.
This only holds if you have no other income. Rental profit, savings interest or a second job all count towards your total and can push you into the higher rate sooner.
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Do you pay National Insurance on dividends?
No. Dividends carry no National Insurance, and that's one of the biggest reasons directors use them.
For comparison, in 2025/26 salary attracts:
- Employee National Insurance at 8% on earnings between £12,570 and £50,270, then 2% above that
- Employer National Insurance at 15% on earnings above the £5,000 secondary threshold
So a salary of £50,000 would carry meaningful National Insurance on both the employee and employer side, all of which dividends avoid. You can model the employee side with our National Insurance calculator.
There's a trade-off, though. If you set salary below the National Insurance thresholds you may not build up qualifying years towards the State Pension. A salary at the £12,570 personal allowance level is a common middle ground: it keeps income tax at nil while protecting your National Insurance record.
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How do you report dividends to HMRC?
Your company doesn't pay tax on the dividends it pays out. As a shareholder, you may owe personal tax, and how you tell HMRC depends on the amount.
You don't need to tell HMRC at all if your dividends are within the £500 allowance.
Above that, HMRC's guidance splits at £10,000 of dividend income:
- Up to £10,000: if you already file a Self Assessment return, report them there. Otherwise, contact HMRC between 6 April and 5 October after the tax year, and they can collect the tax through your tax code or you can call the income tax helpline.
- Over £10,000: you must file a Self Assessment return. If you don't already, register and tell HMRC you need a return by 5 October following the tax year.
The online filing deadline and payment deadline is 31 January after the tax year ends. For 2025/26 (6 April 2025 to 5 April 2026) that's 31 January 2027. Miss it and there's an automatic £100 penalty, with more added the longer it's late.
If Self Assessment isn't your idea of a good evening, our Self Assessment service handles the return and the deadlines for you.
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What's the most tax-efficient way to pay yourself?
Pulling it together, here's the approach that suits most director-shareholders.
Step 1: Pay a salary around the personal allowance. A salary of £12,570 uses your personal allowance, keeps income tax at nil, and protects your State Pension record.
Step 2: Top up with dividends. Take further income as dividends, up to the level your company's distributable profit and your own needs allow.
Step 3: Watch the bands. Staying under £50,270 of total income keeps dividends at the 8.75% rate. If your business is more profitable, it can still be worth taking more even at higher rates, but go in with eyes open.
Step 4: Provide for Corporation Tax first. You can only pay dividends from post-tax profit, so set aside the Corporation Tax before you declare anything.
Step 5: Keep clean records. Board minutes and dividend vouchers for every payment. This is what protects you if HMRC asks questions.
Illustrative example. Priya is a sole director. After Corporation Tax, her company has £80,000 of distributable profit. She takes £12,570 of salary and £50,000 of dividends, leaving £17,430 retained in the company.
Her income tax on the dividends is £7,406.25 (the same calculation as above), and she pays no employee National Insurance on a salary at the personal allowance. She keeps £17,430 in the company as a buffer or for reinvestment.
Whether to take more, retain more, or use pension contributions instead depends entirely on your own position, which is the sort of thing worth talking through with an accountant rather than guessing at.
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What happens if you pay illegal dividends?
An illegal (or unlawful) dividend is one paid when the company doesn't have enough distributable profit to cover it. Distributable profit means accumulated realised profits less accumulated realised losses, after tax.
If you pay more than that, the dividend is unlawful even if it was an honest mistake. The consequences can include:
- Personal liability. Directors can be required to repay an unlawful dividend to the company under the Companies Act 2006, particularly where they knew or ought to have known there weren't enough reserves.
- Tax recharacterisation. HMRC may treat the payment as something other than a dividend, which can mean income tax and National Insurance instead.
- Insolvency scrutiny. If the company later fails, a liquidator will examine dividend payments closely.
To stay on the right side of it:
- Check management accounts before declaring a dividend
- Make sure reserves comfortably exceed the dividend after tax provisions
- Keep vouchers and minutes for every payment
- Never pay out money you'll need for the tax bill
If you think you've paid one by accident, raise it with your accountant quickly. There are usually ways to put it right, but speed matters.
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What changes from April 2026?
Dividend tax rates change for the 2026/27 tax year, from 6 April 2026. The lower two rates go up; the additional rate stays the same.
| Band | 2025/26 | 2026/27 |
|---|---|---|
| Basic (ordinary) rate | 8.75% | 10.75% |
| Higher (upper) rate | 33.75% | 35.75% |
| Additional rate | 39.35% | 39.35% |
The £500 dividend allowance is unchanged for 2026/27.
Illustrative example. Take the same director as before: £12,570 salary and £50,000 of dividends.
| Slice of income | 2026/27 rate | Tax |
|---|---|---|
| First £12,570 (salary) | 0% | £0.00 |
| Next £500 (dividends) | 0% | £0.00 |
| Next £37,200 (dividends) | 10.75% | £3,999.00 |
| Final £12,300 (dividends) | 35.75% | £4,397.25 |
| Total | £8,396.25 |
That's £990 more than the £7,406.25 due on the same income in 2025/26. The maths: 37,200 x 10.75% = £3,999, and 12,300 x 35.75% = £4,397.25.
With the rates rising, it's worth reviewing your remuneration mix, the timing of dividends across the two years, and whether pension contributions make sense as an alternative. Those are decisions to take with an accountant against your actual numbers, not rules of thumb.
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Frequently asked questions
What is the dividend allowance for 2025/26?
It's £500. You can receive up to £500 of dividends with no dividend tax, on top of your £12,570 personal allowance. Dividends above £500 are taxed at 8.75%, 33.75% or 39.35% depending on your band. The allowance has fallen from £2,000 in 2022/23.
How much tax do you pay on dividends in the UK?
It depends on your total income. For 2025/26, basic rate taxpayers pay 8.75%, higher rate taxpayers pay 33.75%, and additional rate taxpayers pay 39.35%, all on dividends above the £500 allowance and after the £12,570 personal allowance.
Do you pay National Insurance on dividends?
No. Dividends carry no National Insurance for either the individual or the company. That's a key reason directors take part of their income as dividends rather than salary, though you'll usually still want some salary to protect your State Pension record.
What's the most tax-efficient salary and dividend combination?
For 2025/26, a common mix is £12,570 of salary plus £37,700 of dividends, giving £50,270 of total income and total income tax of £3,255. This keeps you in the basic rate band and assumes no other income. Other income sources change the picture.
Can you take dividends if your company makes a loss?
Only if you have enough accumulated distributable profit. A current-year loss doesn't automatically block a dividend if there are retained profits from earlier years. Cash in the bank isn't the test; distributable reserves are. Check before you declare.
How do you report dividends on your Self Assessment?
If your dividend income is over £10,000, you must file a Self Assessment return and tell HMRC by 5 October after the tax year if you don't already file. Up to £10,000, you can report through Self Assessment if you already file, or ask HMRC to collect the tax through your tax code. Dividends within the £500 allowance don't need reporting.
Do Scottish taxpayers pay different dividend tax rates?
No. Scottish income tax applies to salary and employment income, but dividends are taxed at the UK rates: 8.75%, 33.75% and 39.35% for 2025/26. Because Scottish bands differ, the salary point at which you reach higher rate territory can vary.
Will dividend tax rates change in 2026/27?
Yes. From 6 April 2026 the basic rate rises to 10.75% and the higher rate to 35.75%. The additional rate stays at 39.35% and the £500 allowance is unchanged. For a director on £12,570 salary and £50,000 dividends, that's roughly £990 more tax a year.
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Talk to a Zmartly accountant
Getting your salary and dividend mix right is worth real money, and the rates are moving. If you'd like us to model your numbers, check your distributable reserves, and handle the paperwork, book a free call with a Zmartly accountant. We work with small businesses and contractors every day.
