If you receive dividend income — whether from shares you own or as a company director paying yourself through a limited company — you need to understand how it is taxed. Dividend tax works differently from income tax on salary: the rates are lower, there is no National Insurance, and you get a separate tax-free allowance. This guide explains the rules for 2026/27.
The Dividend Allowance
The first £500 of dividend income you receive each year is tax-free. This is the Dividend Allowance. It applies regardless of your total income or which tax band you fall into. Dividends above this amount are taxed at rates that depend on your overall income.
Dividend tax rates for 2026/27
Dividends are taxed after your other income (salary, self-employed profits, rental income). The tax band your dividends fall into determines the rate:
- Basic rate band (up to £50,270): 8.75%
- Higher rate band (£50,271–£125,140): 33.75%
- Additional rate band (above £125,140): 39.35%
Dividends do not attract National Insurance contributions, which is why they are a tax-efficient way for limited company directors to extract profit.
How dividends interact with your salary
Your salary uses up your Personal Allowance and tax bands first. Dividends sit on top. For example, if your salary is £40,000, you have £10,270 of basic rate band remaining (£50,270 minus £40,000). The first £500 of dividends is covered by the Dividend Allowance, then the next £10,270 is taxed at 8.75%, and anything above that is taxed at 33.75%.
Optimal salary/dividend split for directors
Many limited company directors pay themselves a small salary (usually at or just below the NI Primary Threshold of £12,576) and take the rest as dividends. This minimises the combination of Corporation Tax, income tax, and National Insurance paid overall.
The optimal split depends on your total profit, whether you have other employees, and whether you want to preserve State Pension entitlement through NI credits. A salary at the NI threshold ensures a qualifying year for State Pension without triggering employee NI.
Reporting and paying dividend tax
If your dividend income exceeds the £500 allowance, you must declare it through Self-Assessment — even if all your other income is taxed through PAYE. The tax is due by 31 January following the end of the tax year. If you owe more than £1,000, HMRC may require payments on account.
Calculate your dividend tax
Use the dividend tax calculator to enter your salary and dividend income and see exactly how much tax you will pay. For a broader view of your take-home pay including pension contributions and student loans, try the main income tax calculator.