How are dividends taxed and what are the tax rates

Dividends are a way that a company can distribute its profits. In this article, we explain the dividend tax-free allowance including how to calculate the tax payable.

What is a dividend?

If a limited company has made a profit it can distribute this profit, or part of it, to its shareholders by paying a dividend. A limited company can only pay a dividend if it has made a profit in the tax year or the balance sheet shows retained profits from previous years. Profit is the amount of money left after paying business expenses and liabilities.

How are dividends paid?

If your company wants to pay a dividend then a meeting of directors must be held to "declare" the dividend.

A record must be kept of all dividends paid including the following:

• names of shareholders being paid a dividend
• date the dividend is paid
• amount of dividend paid to each director

Using online accounting software records dividend payments simply and quickly. If your company does not already use online accounting software then read our article - What is the best online accounting software for small business?

How are dividends taxed?

Any shareholder in receipt of a dividend may have to pay income tax depending on their personal circumstances. If you are a director of a limited company and are paid a dividend then this can be a tax-efficient way of receiving income. There are no National Insurance Contributions payable on dividend income and the calculation of the income tax liability is explained later in this article.

What is the dividend tax-free allowance?

As an individual, you can receive maximum dividends of £500 without paying income tax in the 2026/27 tax year. This amount is in addition to your personal income tax allowance of £12,570 for the 2026/27 tax year.

What are the dividend tax rates for 2026/27

If dividends received in a tax year exceed the £500 tax-free allowance, and you have used up your personal allowance from other income sources, then your dividend income will be taxed at the following rate.

Income tax band dividend income falls in	Dividend tax rate
Basic Rate	10.75%
Higher Rate	35.75%
Additional Rate	39.35%

How do I calculate my dividend tax bill?

To calculate the income tax payable on dividends received make the following calculation:

• The first £12,570 of income from other sources is received tax-free, this is your personal income tax allowance. Any unused personal allowance can also be used against dividend income.
• In addition, the first £500 of dividend received is tax-free. This is the dividend allowance and is in addition to any unused personal allowance..
• A dividend tax rate of 10.75% is then applied on the next £37,700 of dividend income received.
• After that a dividend tax rate of 35.75% is applied on dividend income falling within the Higher Rate income tax band band (above £50,270 and up to £125,140 of taxable income).
• A dividend tax rate of 39.35% is payable on dividends falling within the Additional Rate band (above £125,140 of taxable income)

The order of taxation of any income received is important. Generally speaking income from employment, trading or property are taxed first. That means that they use your personal allowance first. Earnings from savings income and then dividend income are taxed next. That means that the rate at which your dividends are taxed is dependent upon the level of income you receive from other sources. A worked example is shown at the foot of this article.

When is dividend tax payable?

Any dividends received by an individual must be declared in your Self Assessment income tax return for the tax year in which it was paid. Dividend payments will be added to any other income for the tax year and any income tax due must be paid on or before 31st January of the following year.

If you are a director of a company and have some control over when dividends are paid then you can use this control to mitigate the tax liability on your dividend.

As an example, if it is close to the tax year end and receiving the dividend immediately would put you over the Higher Rate tax threshold you could delay the dividend payment until the next tax year and reduce your tax liability for the current tax year. Remember the tax year for your personal income tax may be different from the tax year for your company accounts and you should keep this in mind when deciding on the payment date for dividends.

How do I pay my dividend tax bill?

Any dividend received must be declared on your Self Assessment income tax return and any income tax liability is calculated as described above. Payment can be made by bank transfer, debit card, direct debit or cheque.

Examples of dividend tax liability for 2026/27 tax year

A company director with a salary of £10,000 and a dividend income of £45,000 will pay the following income tax in the year 2026/27 (Personal Allowance £12,570).

Income	Type	Income Tax Rate	Tax due
First £10,000	Salary	Personal Allowance	Nil
Next £2,570	Dividend	Personal Allowance	Nil
Next £500	Dividend	Dividend Allowance	Nil
Next £37,200	Dividend	Basic Rate Dividend tax of  10.75%	£3.999.00
Next £4,730	Dividend	Higher Rate Dividend tax of   35.75%	£1,690.98
Total Income tax   payable			£5,689.98