How UK dividend tax works in 2025/26
When a UK limited company distributes profits to shareholders, those distributions are called dividends. Dividends are paid from profits that have already been taxed at corporation tax — so they're taxed again at dividend tax rates when they reach you personally. It's two-step taxation: corporation tax first, then dividend tax.
Dividend tax is charged at lower rates than income tax — 8.75% basic / 33.75% higher / 39.35% additional, versus 20% / 40% / 45% for salary — which is why many small-company directors take most of their income as dividends.
How the personal allowance and dividend allowance stack
The order matters. HMRC allocates the £12,570 personal allowance across your income in the most tax-efficient way. In practice:
- Salary uses personal allowance first. If salary is below £12,570, the remainder spills over to cover dividends at 0%.
- The £500 dividend allowance comes next — a nil band inside whatever rate would otherwise apply. It still counts towards deciding your rate band.
- Remaining dividends are taxed. The rate depends on your total income position — basic, higher or additional.
| Income band | Total income range | Dividend rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% (covered by PA) |
| Dividend allowance | First £500 of dividends above PA | 0% |
| 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% |
A director with a £12,570 salary and £40,000 of dividends: salary uses the whole personal allowance, the first £500 of dividends is tax-free (dividend allowance), £37,700 falls in the basic rate band at 8.75% (£3,299), and £1,800 falls in the higher rate band at 33.75% (£607). Total dividend tax: £3,906.— GoForma technical team, 2025/26 tax year modelling
The optimal salary/dividend mix for directors
Most single-director limited companies set salary at £12,570 — the NI primary threshold, also the full personal allowance. That uses the whole allowance against salary (not dividends), incurs modest employer NI of £1,135.50 (single-director companies cannot claim Employment Allowance), and produces the highest overall take-home in most scenarios.
Dividends above the £50,270 basic rate threshold get taxed at the higher rate. A common planning move is to keep dividends below that threshold in one tax year and defer the rest to the next — especially valuable if your income is lumpy or you expect a lower-income year ahead.
How to declare and record dividends properly
Dividends must be paid from retained distributable profits — profits after corporation tax and accumulated from previous years if needed. Paying dividends when the company has no distributable reserves is called an illegal dividend and can be reclaimed by HMRC or a liquidator. Every dividend payment needs:
- A board minute authorising the distribution.
- A dividend voucher for each shareholder showing the gross amount, date and company details.
- Adequate distributable reserves confirmed by up-to-date management accounts.
- Payment actually made from the company's bank account — not just journaled.
When dividend tax is due
Dividend tax is personal tax, paid through Self Assessment. For the 2025/26 tax year (6 April 2025 – 5 April 2026), you report dividend income on your 2025/26 tax return and pay the tax by 31 January 2027. Payments on account may apply if your total tax bill exceeds £1,000.