Dividend Tax 2026/27: Rates, Allowance & Worked Examples

The 2026/27 dividend allowance and rates

Dividends are payments a company makes to its shareholders out of profits. They are taxed differently — and usually more lightly — than salary. For 2026/27, the first £500 of dividends is tax-free under the dividend allowance, and anything above that is taxed at one of three rates depending on your income tax band.

Source: GOV.UK — Tax on dividends. The £500 allowance applies on top of your £12,570 personal allowance.

How dividends stack on top of your income

The key rule is that dividends are treated as the top slice of your income. Your salary and other income are taxed first, using up the personal allowance and basic-rate band, and your dividends sit on top. Whichever band they reach decides the dividend rate. So the same £20,000 of dividends can be taxed at 8.75% for a low earner or 33.75% for someone already in the higher-rate band.

Worked example: director with salary and dividends

Take a company director with a £12,570 salary (using the full personal allowance, no income tax or NI) and £40,000 in dividends:

• First £500 of dividends — covered by the dividend allowance, taxed at 0%
• Next £37,200 falls in the basic-rate band (up to £50,270 total income) at 8.75% = £3,255
• Final £2,300 spills into the higher-rate band at 33.75% = £776.25
• Total dividend tax = £4,031.25

Remember the company has already paid corporation tax on its profits before these dividends were paid, so the headline dividend rate is not the whole tax picture. To run your own salary-and-dividend split and compare scenarios, ukcalculator.com's dividend tax calculator shows the tax for each band as you change the numbers.

Why directors split salary and dividends

Because dividends carry no National Insurance and are taxed at lower headline rates than salary, many owner-directors take a small salary — typically around the personal allowance — and draw further profit as dividends. The salary keeps a National Insurance record and is a deductible company expense, while the dividends are taxed at 8.75% or above rather than 20%-plus income tax with NI on top. The right balance depends on profit levels and corporation tax, so it is worth modelling carefully.

Don't forget your total income tax

Dividends are only one part of your tax return. Your salary, savings interest and other income are taxed under the normal income tax bands, and they also decide which band your dividends land in. It is sensible to estimate your overall income tax bill first, then layer the dividend tax on top, so you can see the full amount due before the 31 January self-assessment deadline.

ISAs make dividends tax-free

Dividends from shares held inside a Stocks and Shares ISA are completely free of dividend tax and do not use up your £500 allowance. With the allowance having shrunk from £2,000 in 2022/23 to just £500 today, sheltering investments in an ISA has become the simplest way for ordinary investors to avoid dividend tax altogether.