How Dividends Are Taxed — 2025/26 Guide
If you own shares in a company — whether as an investor or a limited company director paying yourself — you need to understand dividend tax. In 2025/26, the dividend allowance is just£500, down from £2,000 two years ago.
2025/26 Dividend Tax Rates
| Tax Band | Dividend Rate | vs Salary Rate |
|---|---|---|
| Within £500 allowance | 0% | N/A |
| Basic rate (up to £50,270) | 8.75% | 20% + 8% NI = 28% |
| Higher rate (£50,271–£125,140) | 33.75% | 40% + 2% NI = 42% |
| Additional rate (over £125,140) | 39.35% | 45% + 2% NI = 47% |
Dividends are taxed after your other income. So your salary uses up the Personal Allowance and basic-rate band first, then dividends are taxed at the rates above.
How the £500 Dividend Allowance Works
The first £500 of dividend income is tax-free regardless of your tax band. However, those dividends still count towards your total income and can push other income into a higher band.
Worked Example: £60k Salary + £20k Dividends
Worked Example: Employee with Share Portfolio
| Employment income | £60,000 |
| Dividend income | £20,000 |
| Total income | £80,000 |
| Income tax on salary | |
| Personal Allowance (£12,570 at 0%) | £0 |
| Basic rate (£37,700 at 20%) | £7,540 |
| Higher rate (£9,730 at 40%) | £3,892 |
| Dividend tax | |
| Dividend allowance (£500 at 0%) | £0 |
| Remaining in higher band (£19,500 at 33.75%) | £6,581 |
| Summary | |
| Total income tax | £18,013 |
| Employee NI (on salary only) | £3,210 |
| Effective tax rate on £80,000 | 26.5% |
The salary is fully within the higher-rate band, so all dividends above the £500 allowance are taxed at 33.75%.
Ltd Company Director: Salary vs Dividends
Most limited company directors pay themselves a small salary up to the NI Primary Threshold, then take the rest as dividends. Here’s why:
| Method | £50,000 Extracted | Total Tax + NI | Net Received |
|---|---|---|---|
| All salary | £50,000 | £12,476 | £37,524 |
| £12,570 salary + £37,430 dividends | £50,000 | £5,591 | £44,409 |
The Optimal Strategy for 2025/26
- Pay yourself a salary of £12,570— uses the full Personal Allowance, no income tax, no employee NI. Your company gets a Corporation Tax deduction.
- Take remaining profits as dividends— first £500 is tax-free, then taxed at 8.75% within the basic-rate band (vs 28% combined tax + NI on salary).
- Consider pension contributions— employer pension contributions are Corporation Tax deductible and not subject to NI.
- Watch the £50,270 threshold— dividends above this (total income) jump to 33.75%. Consider deferring or spreading across tax years.
Important:Dividends can only be paid from company profits after Corporation Tax (25% for profits over £250,000, or the marginal rate between £50,000 and £250,000). The total tax on profit distributed as dividends is therefore higher than the dividend tax rate alone — typically around 25% + 8.75% = ~32% effective for basic-rate directors.
Dividend Tax vs Salary Tax Comparison
| Factor | Salary | Dividends |
|---|---|---|
| Employee NI | 8% / 2% | None |
| Employer NI | 13.8% | None |
| Basic rate | 20% | 8.75% |
| Corp Tax deductible? | Yes | No (paid from post-tax profits) |
| Pension qualifying | Yes | No |
| Maternity/sick pay | Qualifies | Does not qualify |
Compare Your Options
Use our calculator to find the most tax-efficient split of salary and dividends for your situation.
Open Dividend vs Salary Calculator →Last updated for the 2025/26 tax year (6 April 2025 – 5 April 2026).