Understanding Dividend Tax in the UK
Dividend tax applies to income you receive from shares in a company, whether that is a large publicly listed business or your own limited company. In the UK, dividends are taxed at lower rates than employment income, making them a popular way for company directors to extract profits. For the 2026/27 tax year, every individual receives a tax-free dividend allowance of £1,000. This was reduced from £2,000 in 2023/24 and from the original £5,000 when dividend allowances were first introduced, reflecting the government's desire to increase tax revenue from dividend income.
Dividend Tax Rates for 2026/27
After the £1,000 dividend allowance, dividends are taxed based on which income tax band they fall into when added on top of your other income. The basic rate for dividends is 8.75%, significantly lower than the 20% rate on employment income. The higher rate is 33.75% for dividends within the higher rate band, and the additional rate is 39.35% for dividends above £125,140 of total income. Dividends do not attract National Insurance contributions, which is one of the main reasons company directors often choose to pay themselves through a combination of salary and dividends.
Salary Plus Dividends: The Optimal Strategy
Many limited company directors pay themselves a small salary at or near the personal allowance of £12,570 and then take additional income as dividends. This strategy minimises both income tax and National Insurance. On a salary of £12,570, no income tax is payable and NI is minimal. Dividends up to the basic rate band are then taxed at just 8.75% with no NI. However, it is important to ensure that the company has sufficient distributable profits to pay dividends and that the arrangement is commercially legitimate.
Corporation Tax and Double Taxation
Dividends are paid from post-corporation-tax profits, meaning the company has already paid 19% to 25% corporation tax on the profits before distributing them. This is sometimes referred to as double taxation, since the individual then pays dividend tax on top. When considering the total tax burden, the combined effective rate on profits extracted as dividends is higher than the headline dividend tax rate alone. Use our calculator above to estimate your personal dividend tax liability and visit our main UK take home pay calculator for employment income calculations.