What tax do you pay on dividends?

What tax do you pay on dividends?

For the 2026/27 tax year, the first £500 of dividend income is tax free under the dividend allowance. Above that, dividends are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% at the additional rate. No National Insurance is due on dividends, which is why they remain a tax-efficient way for company directors to pay themselves.

The basic and higher rates both rose by two percentage points on 6 April 2026, so figures you remember from last year, or read in older guides, are now out of date. This guide explains what dividends are, how the tax is worked out with a full example, and how to report dividend income to HMRC.

Source: Tax on dividends (GOV.UK)

What are dividends and how do they work?

A dividend is a payment a limited company makes to its shareholders out of its profits. Profit here means what is left after the company has met its costs and its own taxes, including Corporation Tax. Dividends are not a business expense, so they do not reduce the company’s Corporation Tax bill, and the company pays no tax on the act of paying them. Any tax due falls on the shareholder personally.

Two rules matter most. A company must not pay out more in dividends than its available profits from the current and previous financial years. And dividends must usually be paid to all shareholders, in line with the shares they hold, so an owner of half the shares receives half of each dividend.

Source: Running a limited company: taking money out (GOV.UK)

How does a company pay a dividend properly?

The paperwork is simple but compulsory. The directors must hold a meeting to declare the dividend and keep minutes, even if you are the only director. For each payment, the company must produce a dividend voucher showing the date, the company name, the names of the shareholders being paid and the amount. Give a copy to each recipient and keep one in the company’s records.

This is not box ticking. If a company cannot show minutes and vouchers, payments taken as dividends can later be challenged and treated as something else, often a director’s loan, which carries its own tax consequences. Five minutes of paperwork at the time avoids a much harder conversation later.

Source: Running a limited company: taking money out (GOV.UK)

What are the dividend tax rates for 2026/27?

Dividends are treated as the top slice of your income, sitting above your salary, profits and other earnings. Once your Personal Allowance of £12,570 and the £500 dividend allowance are used, the rate you pay depends on which tax band the dividends fall into.

1. Dividend allowance: the first £500 of dividends is tax free, though it still uses up part of your tax band.
2. Basic rate: 10.75% where dividends fall within the basic rate band, up to £50,270 of total income.
3. Higher rate: 35.75% where total income is between £50,271 and £125,140.
4. Additional rate: 39.35% where total income is above £125,140.

Two points often catch people out. Scottish taxpayers pay Scottish rates on their salary but UK rates on their dividends, so the figures above apply across the whole UK. And dividends from shares held inside an ISA are entirely tax free and do not need reporting at all.

Source: Tax on dividends (GOV.UK)

Source: Income Tax in Scotland (GOV.UK)

How is tax on dividends worked out? A full example

Take an illustrative example. Amara is the director of a small IT consultancy in Dudley. In 2026/27 she pays herself a salary of £12,570 and dividends of £40,000, with no other income.

1. Her salary of £12,570 is covered exactly by the Personal Allowance, so no Income Tax is due on it.
2. The first £500 of dividends is covered by the dividend allowance: £0.
3. The next £37,200 of dividends fills the rest of her basic rate band and is taxed at 10.75%: £3,999.00.
4. The final £2,300 falls into the higher rate band and is taxed at 35.75%: £822.25.

Her total personal tax for the year is £4,821.25 on income of £52,570, and she pays no National Insurance on the dividends. This example is for illustration only and assumes no other income. Your own position will depend on your circumstances.

Source: Income Tax rates and Personal Allowances (GOV.UK)

How much can you take before paying higher rate tax?

If dividends and a small salary are your only income, the standard approach for 2026/27 is a salary of £12,570 plus dividends of £37,700, giving total income of £50,270, the top of the basic rate band. The salary is covered by the Personal Allowance, £500 of the dividends is covered by the dividend allowance, and the remaining £37,200 is taxed at 10.75%. That is a total tax bill of £3,999 and take-home pay of £46,271.

The right mix is not the same for everyone. Pension contributions, student loans, Child Benefit, other income and the company’s own profit position all change the answer, so it is worth reviewing your figures each year rather than reusing last year’s plan, especially now the dividend rates have risen.

Source: Tax on dividends (GOV.UK)

How do you report and pay tax on dividends?

If your dividends are within the £500 allowance, you do not need to tell HMRC at all. Above that, how you report depends on the amount.

1. Dividends up to £10,000: if you already send a Self Assessment tax return, report them on it. If you do not, tell HMRC after the tax year ends on 5 April and before 5 October, either by asking HMRC to collect the tax through your tax code or by contacting the helpline.
2. Dividends over £10,000: you must fill in a Self Assessment tax return. If you have not filed one before, register with HMRC first.
3. Company directors: in practice, most directors taking dividends from their own company complete a Self Assessment return each year in any case.

Source: How to report tax on dividends (GOV.UK)

Frequently asked questions

Do I pay National Insurance on dividends?

No. Dividends are free of National Insurance for both you and the company. That is the main saving compared with salary, where employees pay 8% on earnings between £12,570 and £50,270 and the company pays employer contributions on top.

Did dividend tax go up this year?

Yes. From 6 April 2026 the basic rate rose from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%. The additional rate stayed at 39.35% and the allowance stayed at £500. The surrounding Income Tax thresholds are frozen until April 2031.

Are dividends from an ISA taxable?

No. Dividends on shares held inside an ISA are tax free, do not use your dividend allowance and do not need to be reported. With the allowance at only £500, holding shares in an ISA where possible is one of the simplest ways to cut your dividend tax.

What if my company pays a dividend it cannot afford?

A dividend paid without enough available profit is unlawful. It can be reclassified, often as a director’s loan, which brings extra tax charges for the company and potentially for you. Always check the company’s profit position, after Corporation Tax, before declaring a dividend.

Can I split dividends with my spouse?

Dividends follow shareholdings, so a spouse or civil partner who genuinely holds shares receives dividends on them and uses their own allowance and tax bands. Share structures need setting up properly and can attract HMRC scrutiny if artificial, so take advice before changing who owns what.

Source: Running a limited company: taking money out (GOV.UK)

How WV4 Accountants can help

With dividend rates newly increased and thresholds frozen, the gap between a well-planned and a badly planned salary and dividend mix is wider than it used to be. WV4 Accountants can help you:

1. Plan the most tax-efficient combination of salary, dividends and pension contributions for 2026/27.
2. Keep your dividend paperwork right, with board minutes and vouchers for every payment.
3. Prepare and file your Self Assessment tax return, including all dividend income.
4. Review your company’s profit position so every dividend is lawful and properly timed.

If you would like a clear answer on the tax on dividends in your own situation, get in touch with WV4 Accountants for a friendly, no pressure conversation.

Important note: This article provides general information. Tax treatment depends on individual circumstances. Current HMRC guidance should be checked before action is taken.