Dividends are a source of income so (inevitably) you’ll need to pay tax on any you receive. They’re taxed at a different rate to other types of earnings which can make things seem a bit confusing, but the rate you need to pay is determined by your total income – so the two are linked.
In this article we explain how dividends work, and what you need to know about reporting and paying dividend tax, as well as the tax-free allowances available. The dividend tax rates increased for the 2026/27 tax year, so we’ll also go over what this means for reporting your income.
**Updated for 2026/27
What is a dividend?
Dividends are a type of payment which a limited company makes to its shareholders from the profits left over after paying Corporation Tax. The total amount of dividends paid out can’t be more than the company’s profits in the current or previous financial year.
How is a dividend different to other types of income?
Unlike other forms of income, such as salaries, dividends aren’t subject to National Insurance, and the rate of tax payable on them is much lower compared to income tax, too. This means dividends are generally a tax-efficient way of taking money out of a limited company.
Who can receive a dividend payment?
Normally anyone who owns a share of the company (a shareholder), will receive a dividend payment in proportion to the number and type of shares which they own.
Shareholders might simply be investors in the company, but they can also be employees, directors, or relatives. Being a shareholder doesn’t necessarily make you a director, but it’s fairly common for someone to be both, particularly in smaller businesses.
How much tax will I pay on my dividends?
The amount of tax you pay on dividends is a percentage of the dividends you receive. It depends on your total income, because this determines what rate (the percentage) of dividend tax you’ll pay. You’ll also be able to deduct any unused tax-free allowances, like the Personal Allowance and the Dividend Allowance. We’ll go over all this step-by-step below!
The good news is you won’t pay National Insurance on your dividends, which is why lots of directors who are also shareholders tend to pay themselves using a combination of a salary topped up with dividends, because it’s more tax efficient.
What tax-free allowances can I use against dividends?
There are tax-free allowances which might help to reduce the amount of dividend tax you would otherwise need to pay. You can use the Personal Allowance (the amount you can earn before starting to pay income tax) as well as a separate Dividend Allowance.
The tax-free Personal Allowance
Known as the personal tax allowance, this is the amount of income you can earn in a tax year before you start getting taxed.
The allowance is only available once in a tax year and it applies to the total amount of income you earn, including any dividends. So, if you receive a £10,000 dividend payment and it’s the only income you have that year, you won’t need to pay any tax on it. Double bonus points for the fact you don’t pay National Insurance on dividends either!
How much is the Dividend Allowance?
The dividend allowance is the total amount of dividends you can earn tax-free in a year. It’s separate to the personal tax allowance and you can use both, so there’s no tax to pay on dividends up to the allowance threshold, regardless of any other income you might receive.
You can use the personal tax-free allowance for most types of income, including dividends, but the dividend allowance can only be used for dividends. We’ll show you some examples below.
Using the tax-free personal allowance and the dividend allowance
Your only income in the tax year is a £13,070 dividend payment
- You can use all of the personal allowance (£12,570) and then your tax-free dividend allowance (£500) against the rest, so you won’t pay tax on it.
You get a salary of £10,000, and then take a £5,000 dividend
- The salary is paid on a monthly basis throughout the year, so this uses up part of your personal tax allowance. The £12,570 personal allowance minus the £10,000 salary leaves £2,570 of your allowance unused at the end of the tax year.
- You can use this leftover amount against your dividend payment. The £5,000 dividend minus the remaining £2,750 of your personal allowance leaves £2,250.
- That’s all of your personal tax allowance gone, but you still have the dividend allowance. £2,250 minus the £500 dividend allowance leaves £1,750 to pay dividend tax on.
What rate of dividend tax will I pay this tax year?
The rate of dividend tax you pay is shown as a percentage, and linked to the total income you receive in the year, because this determines what tax bands your earnings fall into.
For example, you take a salary from your limited company, and this uses up all of your personal allowance, and part of your basic income tax band. You pay yourself a dividend, and this pushes you over into the higher rate band.
- You’ll pay the basic rate of dividend tax on the chunk of your dividend which uses up the rest of the basic rate band
- And then the higher rate of dividend tax on the part which falls into the higher tax band
Dividend tax rates and thresholds
The rate of dividend tax paid in the basic and higher tax bands increased from 2025/26 to 2026/27. Our table below shows the tax bands as well as the rate of dividend tax you’ll pay on any dividend income which falls into those bands.
| Dividend Tax Rate & Threshold | ||
| Tax Band Name | 2025/26 | 2026/27 |
| Personal Allowance | £0 - £12,570 0% | £0 - £12,570 0% |
| Basic rate | £12,571 - £50,270 8.75% | £12,571 - £50,270 10.75% |
| Higher rate | £50,271 - £125,140 33.75% | £50,271 - £125,140 35.75% |
| Additional rate | £125,140 upwards 39.35% | £125,140 upwards 39.35% |
When and how do I pay myself dividends?
You can pay dividends as often as you like, just remember to follow the regulations. Most companies pay dividends quarterly, though some companies choose to pay either bi-annually or annually when the company’s financial year ends.
You’ll need to hold a directors’ meeting to declare the dividends (yep – even if you’re the only director), and record this in the minutes. Each dividend you declare will need a dividend voucher showing the date, company name, the name of the shareholder, and the amount of the dividend. Visit our resource centre for limited companies to use our free director’s minutes and dividend voucher templates.
How and when do I pay dividend tax?
The tax on salary income will be collected through PAYE, but if you receive dividends you’ll need to declare and pay tax on them separately.
You can include your dividend income in your Self Assessment tax return if you normally submit one (or your MTD Income Tax Return if you use that instead). If not, and the total amount you get is less than £10,000, you can ask HMRC to collect it through your wages or pension using your tax code, or by calling the helpline. You’ll need to sign up for Self Assessment to pay tax on dividends if the total you get is more than £10,000 in a tax year.
Am I best taking a salary or paying myself in dividends?
If you are both a director and a shareholder of a limited company, the most tax-efficient way of earning an income may be to pay yourself through a combination of salary and dividends.
As a director, there is no minimum wage threshold so you can pay yourself as much or as little as you like in salary. If this is your sole source of income, the most common method is to pay yourself a salary up to the National Insurance threshold and pay any additional amount as a dividend.
If you have more than one shareholder or director, or another source of income, read our article about director’s salaries and dividends to find out more.
Find out how our online accounting services can help your business by talking to one of the team on 020 3355 4047, or get an instant online quote.
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Very clear and informative thank you
Thank you, this is helpful.