The dividend allowance has been slashed to £500. Here is how dividend tax works in 2025/26, with worked examples and strategies to minimise what you owe.
Dividends are taxed at different rates to employment income. The rates for 2025/26 are:
Basic rate (up to £50,270 total income): 8.75%
Higher rate (£50,271–£125,140): 33.75%
Additional rate (over £125,140): 39.35%
These rates apply to dividend income above the £500 tax-free dividend allowance. The first £500 of dividends is tax-free regardless of your income level.
Dividends are treated as the "top slice" of your income. This means your employment income, pension income, and rental income are taxed first, and dividends sit on top. This pushes more of your dividends into higher tax bands.
The tax-free dividend allowance has been cut dramatically over recent years:
2017/18–2018/19: £5,000 tax-free
2018/19–2022/23: £2,000 tax-free
2023/24: £1,000 tax-free
2024/25 onwards: £500 tax-free
This means almost all dividend income is now taxable. A basic-rate taxpayer receiving £5,000 in dividends pays £393.75 in tax. A higher-rate taxpayer pays £1,518.75 on the same amount. The days of taking moderate dividends tax-free are over.
Tax on £5,000 of dividends (above the £500 allowance):
Basic rate: £4,500 × 8.75% = £393.75 Higher rate: £4,500 × 33.75% = £1,518.75 Additional rate: £4,500 × 39.35% = £1,771.75
Understanding how dividends interact with your other income is crucial. Dividends are added on top of your employment income to determine which tax band they fall into.
Example 1: You earn £40,000 salary and receive £15,000 in dividends. Your total income is £55,000. The salary uses your personal allowance (£12,570) and basic-rate band. Your dividends: first £500 is tax-free. The next £10,270 (up to the higher-rate threshold of £50,270) is taxed at 8.75% = £899. The remaining £4,230 is taxed at 33.75% = £1,428. Total dividend tax: £2,327.
Example 2: You earn £60,000 salary and receive £10,000 in dividends. Your salary already puts you into the higher-rate band. All dividends (minus £500 allowance) are taxed at 33.75%. Dividend tax: £9,500 × 33.75% = £3,206.
Use our tax calculator to model your exact situation — enter your salary and dividend income to see the precise tax breakdown.
If you run a limited company, the salary vs dividend split is one of the most important tax planning decisions you make each year. The optimal strategy depends on several factors:
The standard approach for 2025/26: Pay yourself a salary up to the NI primary threshold (£12,570) to preserve NI credits and use your personal allowance. Take the rest as dividends. This minimises combined corporation tax + personal tax + NI.
Why this works: On a £12,570 salary, you pay 0% income tax and 0% employee NI (below the threshold). Your company pays 15% employer NI on earnings above £5,000 = £1,135.50. Dividends above this salary level are taxed at 8.75% (basic rate) with no NI — versus 40% income tax + 2% NI if taken as salary.
The catch: Dividends are paid from post-corporation-tax profits. Your company pays 19–25% corporation tax on profits before they can be distributed. The combined rate (corporation tax + dividend tax) is higher than most people expect.
Combined effective rates (2025/26): Basic-rate: 25% CT + 8.75% dividend = ~32.8% combined. Higher-rate: 25% CT + 33.75% dividend = ~50.3% combined. Additional-rate: 25% CT + 39.35% dividend = ~54.5% combined.
Dividends received inside an ISA or pension are completely tax-free — no dividend tax, no impact on your dividend allowance, and no reporting requirement.
This makes ISAs and pensions the most efficient wrappers for dividend-paying investments. If you hold shares or investment funds that pay dividends, prioritise holding them inside your £20,000 ISA allowance rather than in a General Investment Account.
If your ISA is full, pension contributions offer even greater tax efficiency — you get income tax relief on the way in, tax-free growth (including dividends), and 25% tax-free on the way out. See our pension vs ISA comparison for the full breakdown.
Use your ISA allowance: Transfer investments into a Stocks and Shares ISA using a "bed and ISA" strategy — sell holdings in your General Investment Account and repurchase inside the ISA. Future dividends are then tax-free. You have £20,000 of ISA allowance per year; couples have £40,000 combined.
Split investments between partners: If your spouse or partner pays a lower rate of tax, consider holding dividend-paying investments in their name (or jointly). A basic-rate taxpayer pays 8.75% on dividends vs 33.75% for a higher-rate taxpayer — a significant difference on the same income.
Pension contributions: If you are a higher-rate taxpayer, pension contributions reduce your taxable income and could move some of your dividend income into the basic-rate band. The strategies tool models this interaction.
Timing dividends (company directors): If you control when dividends are declared, you can spread them across tax years to utilise the £500 allowance twice, or to keep your total income in a lower tax band.
If your total income (including dividends) falls between £100,000 and £125,140, the 60% tax trap applies. Dividends in this band are effectively taxed at much higher rates because they trigger the personal allowance taper.
A dividend received in the trap band does not face just 33.75% tax. It also causes £0.50 of personal allowance to be lost for every £1 of dividend, which is then taxed at the basic rate. The effective rate on dividends in the trap band is approximately 53.75% for higher-rate taxpayers.
If your combined salary and dividends push you into this band, consider making pension contributions to bring your adjusted net income below £100,000. This is especially relevant for company directors who take a mix of salary and dividends.
Dividends under £500: No tax to pay, no need to report (covered by the dividend allowance).
Dividends of £500–£10,000 (and no other untaxed income): You may be able to have HMRC adjust your PAYE tax code to collect the tax through your salary. Call HMRC on 0300 200 3300.
Dividends over £10,000 or self-assessment required: You must file a self-assessment tax return. Dividend income goes in box 4 of the tax return. Payment is due by 31 January following the tax year (e.g., 31 January 2027 for 2025/26 dividends).
Payments on account: If your dividend tax bill exceeds £1,000 and more than 20% of your total tax is collected through self-assessment, HMRC will require payments on account — advance payments towards next year's bill.
1. The £500 dividend allowance means almost all dividend income is now taxable.
2. Dividends are the top slice of your income — they are taxed at whatever band your other income pushes them into.
3. Use ISAs and pensions to shelter dividend-paying investments from tax.
4. Company directors should carefully plan their salary/dividend split each year.
5. Dividends in the 60% trap band are taxed at approximately 53.75% — use pension contributions to escape.
6. Use our [calculator](/calculator) to see your exact dividend tax alongside your full income tax breakdown.