A Comprehensive Guide to UK Dividend Tax for 2025/26
- Irina Inayat
- 1 day ago
- 3 min read
Are you setting up a new limited company or reviewing how you pay yourself as a director? Dividends are often part of the conversation, but many business owners are unsure how they work or how they are taxed.
This guide explains what dividends are, when they can be paid, and what the tax implications are for the 2025/26 tax year.
What is a Dividend?
When your limited company makes a profit, it can distribute some of those post-tax profits to shareholders. These payments are known as dividends.
“Profit” means the surplus remaining after all business expenses, liabilities, and taxes (including Corporation Tax and VAT) have been settled.
Important points:
Dividends cannot be deducted as business expenses for Corporation Tax.
It is illegal to issue dividends if the company does not have sufficient post-tax profits.
Retained profits from previous years can be distributed at a later date, provided they remain available.
For many directors, the most tax-efficient approach is to take a combination of:
A modest salary, and
Dividends from company profits.
The salary is processed through PAYE like any employee’s earnings.
How Does a Company Distribute Dividends?
To issue a dividend, directors must:
Hold a directors’ meeting to declare the dividend
Record minutes of the meeting
Issue a dividend voucher for each payment
Even if you are the sole director, this paperwork is still required.
Each dividend voucher must include:
Date of payment
Company name
Shareholder name
Dividend amount
Dividends are paid according to shareholding percentages. If you own 50% of shares, you receive 50% of the declared dividend.
What Are the Tax Implications?
The company does not pay tax on the dividends it distributes. However, shareholders pay tax on dividends received via Self-Assessment.
Dividends:
Are not subject to National Insurance Contributions (NICs)
Are taxed at different rates from salary
For 2025/26, many directors continue to take a salary at or around the National Insurance threshold and extract additional income via dividends.
Dividend Allowance & Personal Allowance (2025/26)
For the 2025/26 tax year:
Personal Allowance: £12,570
Dividend Allowance: £500
The Dividend Allowance means the first £500 of dividend income is taxed at 0% (but still counts towards your tax band).
Once your Personal Allowance and Dividend Allowance are used, dividends are taxed at the following rates:
Tax Band | Dividend Tax Rate 2025/26 |
Basic Rate | 8.75% |
Higher Rate | 33.75% |
Additional Rate | 39.35% |
These rates remain unchanged from the previous tax year.
2025/26 Example
Let’s assume a director takes:
Salary: £12,570
Dividends: £50,000
Step 1: Salary
The salary uses the full Personal Allowance, so no income tax is due on the salary.
Step 2: Dividend Allowance
The first £500 of dividends is tax-free.
Step 3: Basic Rate Band
For 2025/26, the basic rate band is £37,700.
Since the Personal Allowance has already been used by salary, the remaining £37,700 of dividends falls into the basic rate band.
Tax on £37,700 at 8.75% = £3,298.75
Step 4: Higher Rate
Remaining dividends:
£50,000 – £500 – £37,700 = £11,800
Tax on £11,800 at 33.75% = £3,982.50
Total Dividend Tax Payable:
£3,298.75 + £3,982.50 = £7,281.25
This example illustrates how dividend income moves through the tax bands once allowances are exhausted.
Understanding dividend tax is essential for limited company directors.
While dividends remain tax-efficient compared to salary (particularly due to the absence of NICs), the reduction of the Dividend Allowance to £500 means careful planning is now more important than ever.
A structured approach, balancing salary, dividends, and long-term tax strategy, ensures you remain compliant while optimising your position.
At Penn Accounts, we help directors navigate dividend planning with clarity and confidence, ensuring your remuneration strategy aligns with both current legislation and your broader financial goals.
0207 183 6623
The information provided in this article is not intended to constitute professional advice and you should take full and comprehensive legal, accountancy or financial advice as appropriate on your individual circumstances by a fully qualified Solicitor, Accountant or Financial Advisor/Mortgage Broker before you embark on any course of action.
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