UK dividend tax applies when shareholders receive dividends above the £500 dividend allowance. It is common knowledge that company shareholders and directors receive dividends or income from the profits that the company earns. However, there are certain tax implications. So, what is dividend tax, and how does it work in the UK? A thorough understanding of this area is important not just to plan your finances efficiently but also to stay compliant with HMRC.

This step-by-step guide breaks down how dividend tax is calculated, the current rates and allowances, and what you need to know to manage your dividend income effectively.

What is a dividend?

Own a limited company? Has it made a profit? Those profits can be distributed as income to shareholders. The payments are made after all expenses, liabilities, and taxes—like VAT and Corporation Tax—have been deducted.

For a limited company, dividends are one of the most tax-efficient ways of getting paid.

More about Dividends in a Limited Company

When calculating Corporation Tax, dividends are not considered a business expense. Also, a limited company cannot pay a dividend if it hasn’t made enough post-tax profit. In fact, doing so is illegal.

If there’s not enough profit left after tax to pay dividends to shareholders, the amount is classified as ‘retained profit.’ Retained profits can be accumulated over several years. Directors may choose not to allocate dividends at the end of an accounting period and instead retain the profits for future use. This can be paid out later when it’s financially viable to do so.

As a director, a common strategy is to take a low salary and supplement it with dividends to minimise your overall tax burden. It’s generally the most tax-efficient option available.

Issuing a Dividend as a Limited Company

The process of issuing dividends as a limited company involves the following steps:

• Directors must hold a formal meeting to declare a dividend.
  
• The minutes of this meeting need to be recorded—this applies even if there’s only one director.
  
• A dividend voucher must be issued for each dividend payment.
  

If you’re unsure how to declare dividends correctly, it’s best to work with experienced chartered accountants who can guide you through the process.

Each dividend voucher should include:

• The name of the company
• The date of the dividend payment
• The name of the shareholder receiving it
• The amount paid
  

By regulation, a copy of this voucher must be kept on file for the company’s records, and a copy should also be provided to the shareholder.

What about a Tax on Dividends?

The company does not pay tax on dividend payments.

However, shareholders must pay tax on the dividends they receive. When shareholders file their annual Self-Assessment, the dividend income is included and taxed accordingly.

As the business owner of a limited company, you benefit in two ways: the company doesn’t pay tax on dividends, and you, as an employee, don’t have to pay National Insurance Contributions (NICs) on them either.

Point to note – if your salary exceeds the National Insurance (NI) threshold, both you and the company will be liable to pay NICs on the salary portion.

This is why many limited company owners opt for a combination of a low salary and dividends—to maintain a tax-efficient personal situation.

The Annual Tax-Free Dividend Allowance

Shareholders can receive up to £500 as tax-free dividends for the 2024/25 and 2025/26 tax years.

This is known as the Dividend Allowance and is in addition to the Personal Tax-Free Allowance, which remains at £12,570 for both 2024/25 and 2025/26.

Dividend Tax Rates for 2024/25 & 2025/26

Any income above the £12,570 Personal Allowance and the £500 Dividend Allowance will be taxed, regardless of the source.

The tax you’ll pay on dividend income depends on your income tax band or marginal rate.

The upside? Dividend tax rates are less than regular income tax rates, which makes them particularly appealing to shareholders and company directors.

Here are the dividend tax rates for 2024/25 and 2025/26:

Band	Tax Rate
Basic-rate	8.75%
Higher-rate	33.75%
Additional-rate	39.35%

Scottish taxpayers will pay tax on dividend income based on UK-wide thresholds and rates, even though their other income is taxed according to the Scottish Income Tax bands.

Dividend Tax thresholds for 2024/25 and 2025/26

This is the threshold limit and tax rates applicable till April 4, 2026 – 

Band	Dividend Tax Rate	From	To
Basic Rate	8.75%	£500	£37,200
Higher Rate	33.75%	£37,201	£125,140
Additional Rate	39.35%	Above £125,140

Let’s understand this with an example.

As a company director, let’s say your salary is £12,570 and your dividend income is £50,000. For the 2025/26 tax year, the Personal Allowance remains at £12,570. Here’s how your income tax is calculated step-by-step:

• £12,570 of your salary is covered entirely by your Personal Allowance — so it’s tax-free.
  
• The next £500 of your dividend income also falls within your remaining Personal Allowance, tax-free again.
  
• The next £500 is covered by your Dividend Allowance — again, no tax due here.
  
• The next £37,200 of your dividends is taxed at the basic dividend tax rate of 8.75%, which comes to £3,255.
  
• The final £8,830 of your dividend income falls into the higher rate band as well as it is taxed at 33.75%, amounting to £2,980.13.
• Total Income Tax Payable: £6,235.13

Maximum Amount You Can Take as Salary and Dividend Without Paying a Higher Rate

What amount can you take as salary and dividend from your limited company and stay within the Basic Rate band (for 2025/26 and 2024/25)? Let’s understand this with an example – 

	2025/26	2024/25
Salary	£12,570	£9,100
Dividend	£37,700	£41,170
Total Income	£50,270	£50,279
Personal Allowance	£12,570	£12,570
Taxable Income	£37,700	£37,700
Dividend Allowance	£500	£500
Dividend Taxable @ 8.75%	£37,700	£37,700
Income tax payable	£3,255	£3,255=
Take-home pay	£47,015	£47,015

Need more help in understanding Dividend Tax and making it a tax-efficient proposition for you? Speak with our experts at Cangaf  for professional support and assistance. 

Not sure how much salary and dividends you should take from your company? Contact us to get tailored tax planning advice from our specialists.

Further reading and official guidance

More guides and tools from our team:

• Salary vs dividend calculator
• Director salary and dividends strategy
• How much salary to take from your limited company

Official guidance from HMRC and GOV.UK:

• GOV.UK: tax on dividends
• GOV.UK: how dividends are taxed
• GOV.UK: changes to dividend, savings and property tax rates
• GOV.UK: Income Tax rates and bands

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