Dividend Tax Guide: Rates, Allowances & Tax-Efficient Strategies
Dividend Tax Rates 2025/26
Dividend income is taxed at different rates depending on your income tax band:
- Basic rate (up to £50,270): 8.75%
- Higher rate (£50,270 to £125,140): 33.75%
- Additional rate (over £125,140): 39.35%
Dividend Allowance
The first £500 of dividend income is tax-free (the dividend allowance). This applies regardless of your tax band. The allowance was reduced from £1,000 in 2023/24 and £2,000 in 2022/23.
Salary vs Dividends for Directors
As a company director, you can choose how to extract profits. The most tax-efficient approach typically involves:
- Pay yourself a salary up to the NI Primary Threshold (£12,570) to maintain NI qualifying years without triggering employee NI
- Take remaining profits as dividends which are taxed at lower rates than salary
This saves both employer NI (15% on salary above £5,000) and employee NI (8%).
Example Calculation
On £50,000 of company profits, taking £12,570 as salary and £37,430 as dividends after corporation tax results in significantly less total tax than taking the full amount as salary.
Important Considerations
Dividends can only be paid from company profits. You must declare dividends properly through board minutes and dividend vouchers. Pension contributions based on salary are lower when you take a small salary. Some mortgage lenders prefer to see higher salary income. The optimal strategy depends on your personal circumstances.
Related Calculators
Frequently Asked Questions
How much dividend can I take tax-free?
The first £500 of dividend income is tax-free under the dividend allowance for 2025/26. Beyond that, you pay 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).
Is it better to take salary or dividends?
For most company directors, a combination is most tax-efficient: salary up to the NI threshold (£12,570) plus dividends from remaining profits. This avoids National Insurance on the dividend portion.