Understanding how dividend tax works is essential if you receive income from shares — whether you’re a small-business owner withdrawing dividends from your own company, an individual with a portfolio of UK shares, or a landlord paid dividends from a property company. The rules change periodically, and applying current thresholds and rates correctly can make a significant difference to what you owe. The following draws on real-world experience from dozens of clients over two decades — directors of small companies, landlords, retired investors — to provide practical, clear guidance.
What counts as a “dividend” — and why it matters?
When a company you own distributes profits to you as a shareholder, that distribution is a dividend. Unlike salary or rental profits, dividends are not subject to National Insurance contributions (NICs), but they are taxable under dividend-tax rules. This means even modest amounts need to be declared in a Self-Assessment return once you exceed allowances — a fact that often surprises first-time recipients.
Because dividend income is taxed differently (lower rates than income tax on salary, but no NICs), many small-company directors aim to extract profits via a modest salary plus dividends. But you must be careful with timing, total income, and how the “dividend allowance” operates.
Current thresholds and dividend tax rates (tax year 2025/26 and 2024/25)
Since 6 April 2024, the dividend allowance has been reduced to £500 for an individual per year (down from the earlier £2,000). That means your first £500 of dividend income is taxed at 0%. Once you exceed that, dividends are taxed according to which income-tax band you fall into after adding your dividends to any salary, rental income, interest, or other taxable income.
Here is how the rates work in 2025/26:
| Income Band (after deducting personal allowance and allowances) | Dividend Tax Rate (on dividend amounts above £500) |
| Basic rate band (20% income tax bracket) | 8.75% |
| Higher rate band (40% income tax bracket) | 33.75% |
| Additional rate band (45% income tax bracket) | 39.35% |
You reach the basic-rate band if your total taxable income (salary + dividends + other taxable sources) does not exceed the basic-rate threshold (personal allowance plus ~£37,700, though this can be slightly adjusted depending on allowances and other deductions). Once taxable income exceeds that threshold — up to the higher-rate limit (which may be adjusted depending on benefits, allowances and other factors) — dividends above the allowance get taxed at 33.75%. Any amount falling into the additional-rate band is charged at 39.35%.
How the dividend allowance works in practice
Consider a modest-income director of a small private limited company: you take a salary of £12,570 (equal to the personal allowance) and want to withdraw £10,000 in dividends in the 2025/26 tax year. Here’s how it plays out:
- First £500 of dividend is tax-free (dividend allowance)
- The remaining £9,500 is taxed at 8.75% (assuming it falls entirely in the basic-rate band)
- Tax liability = £9,500 × 8.75% = £831.25
That is substantially lower than if you had taken £10,000 as salary, which would have triggered income tax (about £1,486 after personal allowance) and NICs (both employer and employee NICs if paid via PAYE). From a cash-flow and tax-efficiency perspective, dividends often remain more attractive for company shareholders.
If the same individual later withdraws additional dividends and their total taxable income crosses £50,270 (i.e. into higher-rate territory), dividends above that point jump to 33.75% — significantly reducing net benefit.
Common pitfalls emerging from practical experience
Many clients assume the £500 allowance wipes out most of their dividend tax, failing to plan for larger withdrawals or additional income sources. Others mistakenly believe dividends should be taxed like a salary, and end up overpaying via payroll.
Another frequent mistake is overlooking other income sources — rental profits, interest, consulting income — which push dividends into higher-rate bands. A £5,000 rental profit alongside £10,000 dividends might take you over the basic-rate threshold, turning much of the dividend income taxable at higher rates.
Dividends, whether from a company you control or from listed shares, must be declared on a Self-Assessment return if total dividends exceed the £500 allowance, or if combined income triggers higher or additional-rate tax. For companies that send out PAYE P60/P45S, dividends will not appear there — they are reported as separate ‘Dividend’ entries on your tax return.
How dividends compare with employment income or rental profits
Dividends remain appealing because:
- They avoid NICs entirely — a benefit for company directors.
- Their lower tax rates (8.75% / 33.75% / 39.35%) often compare favourably with income tax + NICs on salary.
However, this advantage depends on your entire income profile. If you receive salary, bonuses, benefits-in-kind, rental income, or interest, dividends may quickly lose their attractiveness.
An example: a director who earns a £20,000 salary, £5,000 rental profits, and £7,000 dividends might find part of their dividends taxed at 33.75% instead of 8.75% — cutting the supposed benefit.
Real-world timing matters. If you plan to withdraw a large dividend (say £30,000) by the end of the tax year, it may make sense to split withdrawals across two tax years. But remember: companies need to have actually declared and recorded the dividends properly (board minutes, dividend vouchers, maintained capital and distributable reserves) — HMRC will not accept informal drawings as dividends.
Dividend tax when you hold shares in other companies
For individuals receiving dividends from publicly listed companies (or other public companies), the same allowance and rates apply. But there are a few extra issues to watch:
- Overseas dividends: often subject to foreign withholding tax — UK allows credit relief in many cases, but only if your dividend income is declared correctly and foreign tax is credited in your UK Self-Assessment.
- Dividends paid after simplified tax statements or via funds: the £500 allowance and rates remain unchanged.
Where shareholders pay less dividend tax than expected
In practice, a common scenario arises with couples or spouses who hold shares — by allocating share ownership evenly, each can make use of their individual £500 dividend allowance and stay within basic-rate bands. This must reflect legal shareholding (not merely “informal agreement”).
Also, directors sometimes leave a portion of dividends undeclared early in the year, then withdraw when their total income remains low. That said, this requires careful bookkeeping and formal dividend vouchers.
A note about future changes
The £500 dividend allowance applies for 2024/25 and 2025/26. The government has signalled that the allowance will further reduce to £100 from 6 April 2026, unless changed. That would increase the tax burden on small shareholders and company-owning directors.
Consequently, many of my clients are already revising dividend strategies — moving to staggered income, bringing forward expenses or pension contributions, or exploring other tax-efficient extraction routes.
What this means if you’re a basic-rate taxpayer
If you have a relatively modest total income (salary, rent, interest) and plan to draw small-to-medium dividends, the combination of a £500 allowance and an 8.75% rate offers a genuine advantage. In many cases, the dividend-tax liability on dividends up to ~£50,000 total income remains well below what an equivalent salary would attract in income tax + NICs.
For example, a director with a £15,000 salary and £8,000 dividends will likely pay no or minimal dividend tax — depending on allowances and other income. That leaves flexibility and cash flow for their company, while keeping personal tax low.
Because of real-world variance — say, fluctuating rental income, interest from savings, or unplanned bonuses — it’s wise to project anticipated income for the full tax year before deciding dividend amounts. And always ensure proper dividend paperwork.
Moving beyond basic scenarios — higher-rate and additional-rate taxpayers also benefit, relative to salary, but the margin shrinks rapidly as total income rises. Beyond a certain point, dividends taxed at 33.75% or 39.35% may offer little advantage over salary, especially if you plan to reinvest or draw further funds.
In Part 2, I’ll explore more advanced considerations: planning strategies, pitfalls landlords and small business owners often encounter, Self-Assessment timing, interplay with pension contributions and allowances, how overseas dividends are handled, and practical tax-efficiency tips for 2025 onwards.
More complex situations — and how to handle them in practice
When life (or business) gets complicated — rental income, pension contributions, bonuses, overseas dividends — extracting profits via dividends needs more than a simple calculation. Over 20 years advising clients across dozens of UK sectors, including small corporate landlords, tech contractors, property companies, and passive investors, I’ve seen certain recurring patterns.
Dividend planning involving couples, multiple income sources, and pension contributions
Couple’s planning: If you and your spouse or civil partner each own shares, you can effectively double the £500 allowance and apply basic-rate bands separately — provided share ownership is legally documented (share register, share certificates). This works well for married couples who run a family company or jointly invest in public equities.
Example: a family-run company issues 50/50 shareholding; each spouse draws £6,000 dividends. That is £6,000 × 2 = £12,000 — but each spouse benefits from a £500 allowance, and is taxed at basic rate if within limits.
Flights, repeat allowances, and pension interplay
If dividends push you into higher-rate taxation (> ~£50,000 overall taxable income), you could offset by increasing pension contributions (by employer or personal). Pension contributions reduce taxable income — potentially pulling dividends back into the basic band or leaving more room within the allowance. This is particularly relevant for directors of small companies who can declare employer pension contributions through their limited company.
For some clients — especially older ones — contributing to a pension or combining dividends with personal pension contributions before 5 April can reduce tax sharply, even when they draw moderate dividends.
Tax-efficiency tools that most of my clients use:
– Staggering dividend withdrawals across tax years (e.g. part before 5 April, part after 6 April) to benefit from the new dividend allowance or banding.
– Co-ordinating dividend withdrawals with pension contributions or company expenses — especially when approaching higher-rate threshold.
– Where possible, splitting share ownership between spouses/partners or distributing via family trusts or companies (though trusts require separate planning regarding trust-tax rules).
Self-Assessment, filing, and deadlines
Since dividends are taxed under “savings & dividend income”, not PAYE, HMRC will generally expect a Self-Assessment if dividends (net of £500 allowance) exceed the tax-free allowance or if combined income requires additional tax.
Key deadlines and practical reminders:
– Register for Self-Assessment by 5 October following the end of the tax year if you have not already.
– File by 31 January (online) — and pay any tax owed by that same date to avoid interest or penalties.
– Keep dividend vouchers, company board minutes, share certificates and bank statements; HMRC can ask to see them up to six years after the end of the tax year.
– Especially important with small companies — you must have genuinely declared distributions out of profits, not just sent money informally.
Landlords, property companies and dividend tax — a common scenario
Many clients run property rental businesses inside limited companies. Often, they aim to pay themselves dividends periodically rather than a salary. That works — but there are two common errors:
First, they assume rental profits automatically translate to distributable dividends. That’s not always true: the company must have sufficient retained profits after corporation tax, and the company accounts and dividend vouchers must reflect actual distributable reserves. Issuing dividends beyond reserves can lead to accounting problems and even personal liability in extreme cases.
Second, they overlook the rush to extract funds by year-end, resulting in a large dividend taxed at higher-rate levels — all because they didn’t calculate combined income (salary plus rental profits plus other income). In one recent case, I advised a landlord family who — seeing declining demand — decided to extract a big dividend after rental income dipped. Because they had also received interest from savings and some consultancy income, a large chunk was taxed at the additional rate, eroding much of the perceived tax benefit.
Foreign dividends and international tax planning pitfalls
If you receive dividends from non-UK companies (or funds investing overseas), additional considerations arise. Often, foreign companies withhold tax at source. Under double taxation agreements, UK taxpayers can usually claim a foreign tax credit — but only if properly declared in the Self-Assessment.
Many investors forget: declaring foreign dividends can push your total income into a higher tax band, inflating UK dividend tax on top of foreign withholding. If foreign withholding has already been substantial, claiming a foreign tax credit makes sense, but it also might create a larger UK tax liability than expected.
For non-domiciled UK residents (or those with mixed residence history), tax-efficiency strategies sometimes involve timing distributions or using offshore companies. But such routes are complex, increasingly scrutinised by HMRC’s anti-avoidance divisions, and not automatically advisable.
Corporate-to-personal dividend strategies: what directors need to watch?
Directors often extract funds via dividends rather than salary to avoid employer/employee NICs and reduce payroll administration. But over-zealous dividend distribution — pulling out too much or at the wrong time — can backfire:
– If the company doesn't have sufficient retained profits (after corporation tax and other liabilities), the dividends may not be lawful.
– Dividends must be formally declared: board minutes, director/shareholders resolutions, dividend vouchers, proper share register. Informal “owner payments” may be recharacterised by HMRC — potentially as a loan requiring later repayment or subject to company tax issues.
– Sudden, large dividends can trigger additional personal tax (higher or additional rate) — wiping out the NIC savings.
It’s often advisable to plan dividends across the tax year, not just at year-end — especially for companies with uneven income flows. Corporate profitability, personal income, pension contributions, and upcoming liabilities should all feed into a dividend extraction plan.
A worked example with planning
Suppose you run a property-management company that expects to make a net profit (after corporation tax) of £60,000 in 2025/26. You want to extract £40,000 for personal use, but avoid excessive tax. You and your spouse each own 50 % of the shares. You also expect rental income from a personally owned property of £5,000 and have been offered a small salary of £10,000 from another consultancy job.
If you simply withdraw £40,000 dividends, dividing 50/50: each receives £20,000.
– Each person does £20,000 – £500 = £19,500 taxable dividend.
– Add £2,500 salary (assuming £8,500 of personal allowance remains unused).
– Total taxable income per person remains well within the basic-rate band. Dividend tax is £19,500 × 8.75% ≈ £1,706.
Overall, the couple takes £40,000 gross, pays about £3,412 dividend tax combined — far lower than drawing £40,000 as salary (which would have attracted NICs, income tax at 20/40 %, and payroll admin).
If instead one person took £30,000 alone, tax would rise steeply: after allowance, a portion of the dividend might hit the higher-rate band, taxed at 33.75%. That might result in ~£6,000–£7,000 dividend tax, dramatically reducing net cash.
This is why dividend planning, share allocation, and understanding personal vs company income are vital — something I emphasise with every client.
When dividends are not worth it
For higher-rate or additional-rate earners with other income (rental, bonuses, interest, pension income), extracting via dividends might add complexity without much benefit. A director drawing large bonuses, or a landlord earning heavy rental profit, may find that salary plus pension contributions or investing via an ISA offers better tax-neutrality.
Similarly, if you anticipate needing to draw further funds (e.g. for a mortgage, large purchase), repeated high-level dividends could push you over thresholds, eroding the 8.75 % benefit — and creating potential complications with repayments, cash-flow management, or even company solvency if profits are thin.
Checklist for a sensible dividend-tax strategy
From decades of advising clients, I recommend the following routine checklist:
– Review total personal income at start of tax year (salary, rent, interest, pension, expected dividends).
– Project potential dividends for the year, and split between shareholders if applicable.
– Consider timing — spread out dividend payments to avoid pushing taxable income into higher bands.
– Explore pension contributions (private or via company) to reduce taxable income and preserve basic-rate band.
– Maintain proper dividend documentation: board minutes, company accounts, dividend vouchers, share register.
– File Self-Assessment on time; declare all dividends (UK or foreign), claim foreign tax credits where appropriate.
– Revisit strategy if tax laws change — e.g. dividend allowance reduction, corporation tax, income thresholds.
Why have many clients recently re-examined their dividend strategy
With the reduction of dividend allowance from £2,000 to £500 from April 2024, many small business owners found their typical dividend distributions suddenly incurred extra tax — the “£1,500 free dividend” cushion had shrunk dramatically.
Conclusion:
– Taking smaller dividends;
– Compensating with a modest salary (still within personal allowance) to protect pension continuity and benefit entitlement;
– Increasing pension contributions via the company to reduce taxable income;
– Using spouses or family members as shareholders where appropriate;
– Delaying some dividends until after 6 April 2026 — if the political and fiscal environment suggests allowance might be restored or rates reduced (though that remains uncertain).
Furthermore, you can read more about this on My Tax Accountant, which is located in London.