How dividends are taxed
Dividends are treated as the top slice of your income:
- Non-dividend income first. Salary, pension income, profits and rent use your personal allowance and fill the bands first.
- Any personal allowance left over covers dividends at 0%.
- The £500 dividend allowance is taxed at 0% but uses band space.
- The rest is taxed at 10.75%, 35.75% or 39.35% depending on which band it falls in. Bands are UK-wide: £37,700 of basic rate band above the personal allowance, then higher rate up to £125,140.
Worked example: salary at the allowance, £40,000 of dividends
This is the classic company director mix.
Salary £12,570 + dividends £40,000, 2026/27
The salary uses the whole personal allowance. The first £500 of dividends is covered by the allowance. The next £37,200 fills the rest of the basic rate band at 10.75%, and the final £2,300 falls into the higher rate band at 35.75%. Dividend tax: £4,821.25.
Dividend tax£4,821.252026/27
- Dividends after tax
- £35,179
- Effective rate on dividends
- 12.05%
- Tax and NI on salary
- £0
How the dividends are taxed
- Dividend allowance (0%)
- £500.00
- Basic rate 10.75%tax
- £3,999.00
- Higher rate 35.75%tax
- £822.25
- Additional rate 39.35%tax
- £0.00
- Total dividend tax
- £4,821.25
What changed on 6 April 2026
The ordinary dividend rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. The additional rate stayed at 39.35%. On the example above, the director pays £790 more than in 2025/26. The dividend allowance remains £500, down from £2,000 in 2022/23.
Tips
- Use ISAs (£20,000 a year) to shelter dividends completely.
- Spouses and civil partners can each use their allowance and basic rate band; transferring shares between you is free of capital gains tax.
- Time dividends across tax years where you control them, to keep income within the basic rate band.
- Pension contributions from a company are deductible for corporation tax and avoid dividend tax altogether.