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Tax

What is Dividend Allowance?

The dividend allowance is the amount of dividend income you can receive tax-free each year.

Current Rate (2025/26)

£500 (2025/26)

Example

First £500 of dividends is tax-free. A £10,500 dividend means £10,000 is taxable.

Key Dates

Applies per tax year

How Dividend Allowance Works in Practice

The dividend allowance is a tax-free amount that every UK individual can receive in dividend income each year without paying any dividend tax. For 2025/26, the dividend allowance is £500. This is a significant reduction from the £2,000 allowance that applied until April 2023 and the £1,000 that applied in 2023/24. The steady reduction reflects the government's efforts to increase tax revenue from dividend income.

The dividend allowance works as a zero-rate band, not a deduction. This is an important distinction. The first £500 of dividend income is taxed at 0% (the dividend nil rate). Dividends above this are taxed at the rate applicable to your income tax band: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. The dividend allowance does not reduce your total taxable income or shift other income into lower bands -- it simply applies 0% tax to the first £500 of dividends.

For director-shareholders of UK limited companies, the dividend allowance is a key component of the salary/dividend extraction strategy. The typical approach is to pay a salary up to the Personal Allowance (£12,570) and then take additional income as dividends. Even with the reduced £500 allowance, dividends are still taxed more favourably than salary because they do not attract National Insurance contributions from either the employee or employer.

The dividend allowance is per individual, not per company. If you receive dividends from multiple companies or investment portfolios, they all share the same £500 allowance. It cannot be transferred between spouses, although each spouse has their own £500 allowance, which is why some directors structure shareholdings between themselves and their spouse to utilise two sets of allowances and tax bands.

Step by Step

When you declare and receive dividends, the first £500 falls within the dividend allowance and is taxed at 0%. Any dividends above £500 are taxed at the dividend rate corresponding to your income tax band. To determine your tax band, all income sources are stacked: salary and other non-savings, non-dividend income first, then savings income, then dividend income on top.

For example, if your salary is £12,570 (using the full Personal Allowance) and you take £30,000 in dividends, the calculation works as follows: the first £500 of dividends is tax-free. The next £29,500 falls within the basic rate band (up to £50,270 total income) and is taxed at 8.75%. If your total income including dividends pushes you above £50,270, the portion above that threshold is taxed at 33.75%.

You declare dividend income on your Self Assessment tax return. If your total dividend income is under £500, you have no additional tax to pay and may not even need to complete a return (though most directors need one anyway for other reasons). If dividends exceed £500, the tax is payable through Self Assessment by 31 January following the end of the tax year.

Practical Tips

  • Even with the reduced £500 allowance, dividends remain more tax-efficient than salary due to the absence of National Insurance -- maintain a salary/dividend strategy
  • If your spouse is a shareholder and has unused Personal Allowance and basic rate band capacity, dividends paid to them can significantly reduce the family tax bill
  • Time dividend declarations around the 5/6 April tax year boundary to use two years' dividend allowances across a short period if useful
  • Review your total dividend income across all sources (not just your own company) when planning, as they share the same £500 allowance

Common Mistakes to Avoid

  • Thinking the dividend allowance reduces your total income or shifts other income into lower bands -- it is a 0% rate band, not a deduction
  • Planning around the old £2,000 or £1,000 allowance and not updating calculations for the current £500 figure
  • Failing to account for dividend income pushing you from the basic rate into the higher rate band, where the tax rate jumps from 8.75% to 33.75%
  • Not considering the cumulative effect of salary, dividends, rental income, and other income when calculating which dividend tax rate applies

Frequently Asked Questions

What is the dividend allowance for 2025/26?

The dividend allowance for 2025/26 is £500. This means the first £500 of dividend income you receive in the tax year (6 April 2025 to 5 April 2026) is tax-free. It was reduced from £1,000 in 2023/24 and from £2,000 before that.

Can I transfer my dividend allowance to my spouse?

No. The dividend allowance cannot be transferred between spouses. However, each individual has their own £500 allowance. If both you and your spouse are shareholders, you each have a separate £500 tax-free dividend allowance, plus your own Personal Allowance and tax bands.

Is the dividend allowance in addition to the Personal Allowance?

Yes. The Personal Allowance (£12,570) and the dividend allowance (£500) are separate. Your Personal Allowance covers all income types first. Dividend income above the Personal Allowance then gets the benefit of the £500 dividend allowance at 0%. In practice, if your salary uses the full Personal Allowance, your first £500 of dividends is still tax-free.

What tax rate do I pay on dividends above the allowance?

For 2025/26: 8.75% if you are a basic rate taxpayer (total income up to £50,270), 33.75% if a higher rate taxpayer (income £50,271 to £125,140), and 39.35% if an additional rate taxpayer (income over £125,140). These rates are lower than the equivalent Income Tax rates on salary.

Does the dividend allowance apply to all dividends including investment portfolios?

Yes. The £500 allowance covers all dividend income from every source -- your own company, other shareholdings, investment funds, and share portfolios. They all share the same single £500 allowance.

Source: HMRC guidance on tax on dividends: https://www.gov.uk/tax-on-dividends

Related Terms

Dividend

A dividend is a payment a company makes to its shareholders from its profits. For director-shareholders, it's a tax-efficient way to extract money from your company.

Personal Allowance

The Personal Allowance is the amount of income you can earn each year before paying Income Tax.

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