Paying yourself in dividends remains one of the most common ways for limited company directors to take money out of their business. The tax rules are straightforward once you understand how the allowance, the rates and the reporting obligations fit together. This article covers all three.
- Dividend tax is paid by the individual shareholder via Self Assessment, unlike salary which is taxed at source through PAYE.
- The £500 dividend allowance sits on top of the £12,570 personal allowance and is frozen until April 2028, bringing more people into dividend tax.
- Dividend tax rates are lower than income tax and attract no National Insurance, so a mix of modest salary and dividends is usually more tax‑efficient.
- Dividends must be properly declared with minutes and vouchers, paid only from post‑tax profits, and reported correctly to HMRC through Self Assessment where required.
What Is a Dividend?
A dividend is simply a payment made to shareholders from a company’s post-tax profits. Once a limited company has paid corporation tax on its earnings, the remaining profit belongs to the shareholders. The directors can then choose to distribute some or all of it as dividends.
Only shareholders can receive dividends. If you own shares in your own company, that means you can pay yourself this way, but only from available profits. Paying a dividend that exceeds the company’s retained profits is illegal, and HMRC treats it as an unlawful distribution.
Who Pays Dividend Tax?
Dividend tax is paid by the individual shareholder, not by the company. The company pays corporation tax on its profits first. Then, when dividends are distributed, the shareholder is personally responsible for any dividend tax owed. This is declared and paid through HMRC’s Self-Assessment system.
A salary is different. Salaries are processed through PAYE, and income tax is deducted at source. With dividends, there is no automatic deduction. The shareholder must declare their dividend income and pay any tax owed after the end of the tax year.
The Dividend Allowance
Every individual has a dividend allowance: a tax-free amount they can receive in dividends each year before dividend tax applies. The allowance for the 2025/26 tax year is £500. It has been frozen at this level until April 2028 under current government plans.
The allowance applies on top of the personal allowance of £12,570. That means a shareholder with no other income can receive up to £13,070 in dividends in 2025/26 without paying any tax at all. The first £12,570 is covered by the personal allowance, and the next £500 by the dividend allowance.
The allowance was £5,000 as recently as 2017. It was cut progressively and reached £500 in the 2023/24 tax year. The effect of this reduction is that many more directors and investors now pay dividend tax than did so a few years ago.
Dividend Tax Rates for 2025/26
The rate of dividend tax you pay depends on which income tax band you fall into. To find your band, add your total dividend income to your other income for the year.
| Tax band | Taxable income | Income tax rate | Dividend tax rate |
|---|---|---|---|
|
Personal Allowance |
Up to £12,570 |
0% |
0% |
|
Basic rate |
£12,571 to £50,270 |
20% |
8.75% |
|
Higher rate |
£50,271 to £125,140 |
40% |
33.75% |
|
Additional rate |
Over £125,140 |
45% |
39.35% |
These rates apply for the 2025/26 tax year. Dividend tax rates are lower than the equivalent income tax rates at every band, which is why many limited company owners choose to take a combination of a small salary and dividends.
What Changed in April 2026?
From 6th April 2026, dividend tax rates rose for basic- and higher-rate taxpayers. The basic rate increased from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. The additional rate remains at 39.35%.
The dividend allowance stays at £500 for 2026/27. The personal allowance also remains at £12,570. The rates table below applies from 6th April 2026:
| Tax band | Dividend tax rate from April 2026 |
|---|---|
|
Basic rate |
10.75% |
|
Higher rate |
35.75% |
|
Additional rate |
39.35% |
Directors planning their salary and dividend mix for the current tax year should use the 2026/27 rates when calculating what they will owe.
Why Dividends Are Still Tax-Efficient
Even after the April 2026 rate increases, dividends remain more tax-efficient than salary for most directors. Unlike a salary, dividends do not attract National Insurance for the company or the individual. This applies regardless of how much you take in dividends.
A director paying themselves £50,000 entirely as salary would pay income tax at the basic rate plus employer’s and employee’s NI. The same amount taken as a mix of a small salary (typically around £12,570) and dividends costs significantly less in tax and NI combined.
The one thing to watch is that dividends are paid from post-corporation-tax profits. A salary reduces the company’s taxable profit before corporation tax. A dividend does not. So the two are not directly comparable. The tax saving comes from the combined effect of lower dividend tax rates and the absence of NI.
How to Pay Yourself a Dividend Correctly
HMRC requires that dividends be declared at a formal directors’ meeting, even if you are the only director. A record of that meeting must be kept. This document is called a dividend voucher.
Each dividend voucher must include:
- The date of the dividend
- The company name
- The names of the shareholders receiving payment
- The amount per share
Without them, HMRC can challenge whether a payment was a genuine dividend or something else, such as a salary or a director’s loan. Many directors use a simple template to keep this straight. The minutes and voucher should be filed with the company’s records.
Practical Examples of Dividend Tax
These examples use 2025/26 rates and apply to England, Wales and Northern Ireland.
Example 1: You receive £12,000 in dividends and no salary. Your entire income falls within the personal allowance of £12,570. You pay no dividend tax.
Example 2: You receive £40,000 in dividends and no salary. The first £12,570 is covered by the personal allowance. The next £500 is covered by the dividend allowance. The remaining £26,930 is taxed at 8.75%. Your dividend tax bill is £2,356.
Example 3: You receive £30,000 in dividends and a salary of £12,570. Your total income is £42,570. The salary uses up the personal allowance. From the dividends, £500 is covered by the allowance. The remaining £29,500 is taxed at 8.75%, giving a dividend tax bill of £2,581.
These figures change once your total income exceeds £50,270. Any dividends above that threshold are taxed at the higher rate.
How to Declare and Pay Dividend Tax to HMRC
If your total dividend income for the year is below the £500 allowance, there is nothing to report. If you owe tax on dividends up to £10,000, you can report this through Self Assessment or by asking HMRC to adjust your tax code so the amount is collected from wages or a pension.
If your dividend income exceeds £10,000, you must file a Self-Assessment. You must register for Self-Assessment by 5th October following the end of the relevant tax year. Most directors already file a return, but new shareholders who have not filed before should register early to avoid late penalties.
Most directors use an accountant to prepare their Self-Assessment return. Getting an accountant involved from the outset makes this straightforward and reduces the risk of costly errors.
Scottish Taxpayers
Scotland has different income tax bands from the rest of the UK. However, dividend tax rates in Scotland follow the UK-wide rates rather than the Scottish income tax rates. The difference is that a Scottish taxpayer’s income tax band is determined using Scottish rates, which affects how much of their dividends falls into the basic, higher or additional band.
For example, a Scottish taxpayer earning £44,000 falls into the intermediate income tax rate band. Their dividends above the allowance are still taxed at 8.75% (basic rate) if their total income stays below £50,270, because dividend tax uses the UK-wide thresholds rather than the Scottish ones.
Paying Dividends from Insufficient Profits
Many directors pay themselves a regular monthly amount without formally declaring a dividend each time. Normally, the accountant reviews the position at year-end, calculates the available profits, and structures the payments as a combination of salary and dividends. This is a normal part of running a limited company.
If the payments exceed the distributable reserves, the excess is treated as a director’s loan. A director’s loan must be repaid within nine months of the company’s accounting year-end. If it is not, the company pays a Section 455 tax charge of 35.75% on the outstanding balance. That charge is repayable once the loan is cleared, but it ties up cash in the meantime. An accountant who reviews the position regularly will flag this well before the deadline.
ISAs and Dividend Tax Planning
Dividends paid on shares held inside an Individual Savings Account (ISA) are not subject to dividend tax. The annual ISA allowance is £20,000. Investors who hold shares outside their ISA may want to consider moving them inside the wrapper to shelter future dividend income.
This is less relevant for director-shareholders paying themselves from their own company, as company shares cannot be held in an ISA. But for those who also hold shares in other companies as investments, the ISA route reduces their dividend tax exposure year on year.
Final Words
When it comes to taxes, it is important to understand how much you will owe personally and how much your company will need to pay to give yourself the full picture. Dividend tax is one of the more manageable aspects of running a limited company, but the rates, allowances, and reporting rules must be applied correctly each year. With the allowance now fixed at £500 until at least 2028 and rates rising from April 2026, the tax cost of taking dividends has increased. The strategy of combining a modest salary with dividends still holds.
Tags: Tax
