Tax on Dividends UK 2026 Rates: Basic 10.75%, Higher 35.75%

If you run a limited company in the UK, the way you pay yourself matters more than ever. Starting in April 2026, dividend tax rates climb by 2 percentage points across most bands — a change that makes the old salary-versus-dividend split worth revisiting. The good news: a small salary still shields the first £12,570 from income tax, while dividends above your £500 allowance are taxed at rates far softer than equivalent salary. Here’s what the numbers actually look like for the 2026/27 tax year.

Dividend allowance: £500 · Basic rate tax: 10.75% · Higher rate tax: 35.75% · Additional rate tax: 39.35% · Personal Allowance impact: Tax-free up to allowance

How much tax do I pay on dividends in the UK?

Dividend tax in the UK works on top of your salary and other income — it’s stacked on top, not separate. The first £500 of dividend income sits tax-free thanks to the dividend allowance, which remains at £500 for the 2026/27 tax year. Above that, what you pay depends entirely on which income band your total earnings fall into.

Basic rate taxpayers

• Dividends within your Personal Allowance: no tax
• Dividends above £500, within basic rate band: 10.75%

Higher rate taxpayers

• Dividends above £500, within higher rate band: 35.75%

Additional rate taxpayers

• Dividends above £500, above £125,140: 39.35%

The implication: for every £1,000 in dividends you take above the allowance, a basic rate taxpayer hands over £107.50 to HMRC while a higher rate taxpayer pays £357.50. That gap widens further when you factor in Corporation Tax already paid at company level — the combined tax burden on dividends includes both layers.

How to avoid tax on dividends in the UK?

Completely eliminating dividend tax isn’t possible for most business owners, but staying within the £500 allowance means zero personal tax on that portion. The strategy that works for many directors involves three moves: keep your salary at or below the Personal Allowance, route profits as dividends above that threshold, and use pension contributions to shelter additional income from both income tax and dividend tax.

Use dividend allowance

• Up to £500 in dividends remains tax-free regardless of your other income
• The GOV.UK dividend tax checker lets you input your exact income to see what you owe

Pension contributions

• Salary counts as relevant earnings for pension tax relief; dividends do not
• Contributing to a pension reduces your taxable income and can pull you down a bracket

Salary sacrifice

• Trading salary for benefits like childcare vouchers or cycle-to-work schemes reduces your tax bill without reducing take-home pay

Is it better to take a salary or dividend in the UK?

This is where UK tax law gets genuinely interesting for company directors. A salary costs you National Insurance Contributions — 8% on earnings between £12,570 and £50,270 — but it counts as a business expense, reducing your company’s Corporation Tax bill. Dividends avoid NICs entirely but sit on top of your income after Corporation Tax has already been paid.

Tax efficiency comparison

• Salary: Subject to income tax and NICs, but reduces Corporation Tax
• Dividend: No NICs, but subject to dividend tax after the allowance

National Insurance differences

• Salary between £12,570 and £50,270: 8% employee NICs
• Salary above £50,270: 2% employee NICs
• Dividends: zero NICs at any level

For small business owners

The most tax-efficient structure for most directors in 2026/27 combines a modest salary set at the National Insurance threshold (£12,570) with dividends taking the rest. A director earning £40,000 total, with £3,000 from dividends, would pay no tax on the first £500 of dividends, then £268.75 on the remaining £2,500 at the 10.75% basic rate. Taking that same £40,000 purely as salary would trigger both income tax and NICs, resulting in a higher combined bill.

How much dividend income is tax-free in the UK?

Exactly £500 sits outside dividend tax entirely — the allowance hasn’t changed between 2024/25 and 2026/27. This sounds small, but it means £500 of your dividend income is yours to keep no matter how high your other earnings climb. The catch: this allowance hasn’t always been this slim.

Dividend allowance details

• The tax-free dividend allowance was £5,000 back in 2016-17 and 2017-18
• It fell to £2,000 from 2018-19 through 2022-23
• It dropped to £1,000 in 2023/24, then halved again to £500 in 2024/25
• For 2026/27, it stays at £500

Personal Allowance overlap

• Your Personal Allowance (£12,570) covers dividend income just like salary
• You do not pay tax on any dividend income that falls within your Personal Allowance
• Once total income exceeds £125,140, the Personal Allowance shrinks by 50p per £2 earned until it disappears

Changes post-Budget

The Autumn Budget 2025 confirmed that dividend tax rates climb by 2 percentage points for basic and higher rate taxpayers from November 2025. The Chancellor’s statement on 26 November 2025 formalised these changes, which were first reported in the months leading up to the Budget.

How are dividends taxed?

Dividend taxation in the UK follows a specific sequence. First, your salary and other employment income are assessed against income tax bands. Then, any dividend income sits on top of that — and the dividend allowance is applied before the tax rate is determined. Reporting is handled through self-assessment, with dividends requiring declaration on your annual tax return.

Tax bands and rates

• Basic rate band (£12,571–£50,270): 10.75% dividend tax in 2026/27
• Higher rate band (£50,271–£125,140): 35.75% dividend tax in 2026/27
• Additional rate band (above £125,140): 39.35% dividend tax in 2026/27

Reporting to HMRC

• Company dividends must be reported on your Self Assessment tax return
• Your company must deduct and report Dividend Tax Credits if applicable
• Deadlines follow the standard Self Assessment calendar — typically 31 January following the tax year

Calculator tools

The GOV.UK dividend tax calculator lets you enter your total income, dividend amount, and tax year to see exactly what you owe. This removes guesswork and helps you plan your draw-down strategy before the tax year ends.

Salary vs dividends: a side-by-side comparison

Three variables matter most when weighing salary against dividends: National Insurance, Corporation Tax treatment, and pension eligibility. The table below shows how each option performs across those dimensions.

The pattern is clear: salary does more for your company tax position, while dividends avoid NICs and often result in a lower marginal rate once Corporation Tax is factored in. Most directors benefit from taking a small salary equal to the Personal Allowance threshold, then topping up with dividends.

Should you take a salary or dividends as a small business owner?

How to calculate your dividend tax bill

Working out what you owe involves three steps: tally your total income, apply the dividend allowance, then apply the relevant rate to the taxable remainder. The process differs slightly depending on whether you’re a basic, higher, or additional rate taxpayer.

1. Add up all income — salary, dividends, rental income, and any other taxable sources go on the same stack
2. Subtract the Personal Allowance — the first £12,570 of total income is tax-free
3. Subtract the dividend allowance — the first £500 of dividends is tax-free on top of the Personal Allowance
4. Apply the dividend tax rate — 10.75% for basic rate, 35.75% for higher rate, 39.35% for additional rate
5. Report via Self Assessment — dividends must be declared on your tax return

“You do not pay tax on any dividend income that falls within your Personal Allowance.”

— GOV.UK official HMRC guidance

“Basic-rate taxpayers pay 10.75% on dividend income above the £500 allowance, while higher-rate taxpayers face 35.75% from April 2026.”

— Daniel Wolfson, tax adviser

What the November 2025 changes mean for you

The dividend tax landscape shifted materially with the Autumn Budget 2025 announcement. For directors who have relied on the salary-dividend split, the 2 percentage point increase doesn’t reverse the strategy’s logic — dividends still typically cost less than equivalent salary once NICs are factored in. But the margin of advantage has narrowed, making precise calculation more valuable than ever.

For small business owners, the choice is clear: take a salary at the Personal Allowance threshold to lock in tax-free income and build NIC credits, then route remaining profits as dividends. The April 2026 changes make this approach slightly more expensive, but not wrong. Run the numbers through the GOV.UK calculator, adjust your dividend draw-down accordingly, and factor pension contributions into the plan — they remain the most effective tax shelter available when salary is involved.

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To counter rising dividend taxes from April 2026, many investors opt for top stocks and shares ISAs that shield share income entirely from HMRC.

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