What is the dividend tax rate in 2025/26?

Dividends received by UK residents are taxed separately from other income, using the dividend tax rates rather than the standard income tax rates. Understanding how dividend tax is calculated is essential for any limited company director who pays themselves a combination of salary and dividends.

For the 2025/26 tax year, the dividend allowance is £500. This means the first £500 of dividend income you receive in the year is tax-free, regardless of whether the dividends come from your own company, shares held in other companies, or funds held in an ISA (which is always tax-free and does not count towards the allowance).

Above the dividend allowance, dividends are taxed at rates that depend on which income tax band they fall into after adding your total income together. Dividends are treated as the top slice of income for this calculation.

The basic rate dividend tax rate is 8.75%. This applies to dividend income that falls within the basic rate band. For 2025/26, the basic rate band runs from £12,571 to £50,270. Dividends in this band, after accounting for salary and other non-dividend income, are taxed at 8.75%.

The higher rate dividend tax rate is 33.75%. This applies to dividend income that falls in the higher rate band, between £50,271 and £125,140.

The additional rate dividend tax rate is 39.35%. This applies to dividend income above £125,140.

To calculate how much dividend tax you owe, add your total salary, self-employment income, rental income, savings interest, and any other income first. Then add your dividend income on top. Work out where the dividend income sits across the bands after your personal allowance (£12,570 for most people) has been applied.

A common director scenario in 2025/26: salary of £12,570 (fully covered by the personal allowance), dividends of £30,000. The first £500 of dividends is covered by the dividend allowance. The remaining £29,500 falls within the basic rate band. Dividend tax due: £29,500 x 8.75% = £2,581.25. This is paid through Self Assessment.

For a director with salary of £12,570 and dividends of £60,000, the calculation is more complex. After personal allowance, the salary of £12,570 is tax-free. The first £500 of dividends is the dividend allowance. The next £37,700 of dividends falls within the basic rate band (up to £50,270 total income). Tax at 8.75%: £37,700 x 8.75% = £3,298.75. The remaining £21,800 of dividends falls in the higher rate band. Tax at 33.75%: £21,800 x 33.75% = £7,357.50. Total dividend tax: £10,656.25.

The dividend allowance was reduced from £2,000 to £1,000 in April 2023 and further to £500 in April 2024, where it has remained for 2025/26. These reductions have increased the tax burden on director-shareholders significantly over recent years.

Dividend tax is paid through Self Assessment, not through PAYE. This means you receive the dividend gross and pay the tax the following January. The payment deadline is 31 January following the end of the tax year in which the dividend was received.

Dividends paid by your company must be supported by sufficient distributable profits (retained earnings after tax). Dividends cannot be paid if the company does not have adequate retained earnings. A dividend paid without sufficient reserves is an unlawful distribution, known as an illegal dividend, and creates a directors' loan account debit.

For planning purposes, the most tax-efficient salary and dividend combination for a director with no other income in 2025/26 is typically: salary set at £12,570 (the personal allowance level) to utilise the allowance without triggering income tax, then dividends to use the remaining basic rate band up to £50,270 total income. Using the £37,700 of basic rate band for dividends results in tax of approximately £3,279 on that tranche, compared to income tax of £7,540 and additional National Insurance if the same amount were taken as salary.