What Is the 2025/26 Dividend Tax Allowance in the UK?

If you run a limited company and take money out through dividends, you’ve probably come across the term dividend tax allowance. It’s something that sounds simple on the surface, but often causes confusion once you start looking at how it actually affects your tax bill.

In this guide, we’ll explain what the dividend tax allowance is, how it works in practice, and what company directors should be aware of when taking dividends. No jargon. No scare tactics. Just clear, practical information.

What Is a Dividend?

A dividend is a payment you take from your limited company’s profits as a shareholder.

Unlike salary, dividends:

• Are not subject to National Insurance

• Can only be paid if the company has made sufficient profit

• Are usually taken alongside a small salary for tax efficiency

This combination is common for company directors, but it does mean dividends need to be planned and recorded properly.

What Is the Dividend Tax Allowance?

The dividend tax allowance is the amount of dividend income you can receive each tax year without paying dividend tax on it.

For the current tax year, the dividend allowance is £500.

This means:

• The first £500 of dividends you receive is taxed at 0%

• Any dividends above £500 may be taxable

The allowance resets every tax year, so it doesn’t roll over if unused.

How the Dividend Allowance Works With Your Personal Allowance

The dividend allowance sits on top of your personal allowance, which is the amount of total income you can earn before paying income tax.

For most people, the personal allowance is £12,570.

So, if dividends are your only income:

• The first £12,570 is covered by your personal allowance

• The next £500 is covered by the dividend allowance

Only after both allowances are used does dividend tax start to apply.

This is why dividends are often used as part of a wider tax-efficient strategy, rather than on their own.

What Tax Do You Pay on Dividends Above the Allowance?

Once your dividend income goes above the £500 allowance, tax is charged depending on your income tax band.

Dividend tax rates are currently:

• 8.75% for basic-rate taxpayers

• 33.75% for higher-rate taxpayers

• 39.35% for additional-rate taxpayers

These rates apply only to the portion of dividends above the allowance, not the full amount.

A Simple Dividend Example

Let’s look at a straightforward example.

You take:

• £12,000 as salary

• £6,000 as dividends

Your first £500 of dividends is tax-free. The remaining £5,500 is taxed based on your tax band.

If you’re within the basic rate band, that £5,500 would be taxed at 8.75%.

This is why keeping track of dividend payments throughout the year is important — it’s very easy to lose sight of the total if you’re taking money out regularly.

Why Dividend Planning Matters More Than It Used To

In previous years, the dividend allowance was much higher. It has been reduced several times and now sits at just £500.

Because of this, dividends need to be planned more carefully than they once were.

We often see people:

• Taking dividends without realising how close they are to a higher tax band

• Assuming dividends are “mostly tax-free”

• Being surprised by a larger-than-expected tax bill at year end

A bit of planning during the year can make a big difference.

Can Dividends Push You Into a Higher Tax Band?

Yes and this is something that often gets missed.

Your tax band is based on your total income, not just dividends. That includes:

• Salary

• Dividends

• Rental income

• Other taxable income

If dividends push your total income into a higher band, the tax rate on the dividends above that point increases.

This is where timing and planning can really help, especially if your income fluctuates year to year.

Do Dividends Need to Be Declared to HMRC?

If your dividend income is above the allowance, or you already complete a

Self Assessment tax return, dividends must be declared.

Even if no tax is due, dividends still need to be:

• Properly recorded

• Backed by company profits

• Supported by dividend vouchers

This admin side is often overlooked, but it’s important — especially if HMRC ever asks questions later on.

Common Dividend Mistakes We See

Some of the most common issues we come across include:

• Taking dividends when the company hasn’t made enough profit

• Not realising dividends count towards tax bands

• Forgetting to declare dividends on a tax return

• Assuming dividends don’t need paperwork

None of these are unusual — but they can cause problems if left unchecked.

The dividend tax allowance can still be useful, but it’s much smaller than it used to be. Understanding how it fits alongside your salary and other income is key to avoiding surprises and staying tax-efficient.

There’s no one-size-fits-all approach. What works well for one director might not be right for another — which is why it’s always worth looking at the full picture rather than just the headline tax rates.

How Treggena Can Help

If dividends, tax allowances, or how to pay yourself are starting to feel confusing, that’s exactly what we’re here for.

At Treggena Ltd, we help business owners understand their numbers, plan ahead, and make tax decisions with confidence — not guesswork.

Whether you just want reassurance that you’re doing things right, or you need ongoing support with your company accounts and tax, we’re always happy to talk things through and help you find the right approach for your situation.

If you’d like a clear, honest conversation about dividends or your wider tax position, feel free

to get in touch with a Treggena accountant.