Key facts
- Dividend allowance 2026/27: £500 tax-free
- Basic rate dividend tax: 10.75% (up from 8.75% in 2025/26)
- Higher rate dividend tax: 35.75%
- Dividends are not subject to National Insurance
Dividend tax rates: 2025/26 vs 2026/27
| Band | 2025/26 rate | 2026/27 rate | Increase |
|---|---|---|---|
| Basic rate (income up to £50,270) | 8.75% | 10.75% | +2% |
| Higher rate (£50,271 to £125,140) | 33.75% | 35.75% | +2% |
| Additional rate (above £125,140) | 39.35% | 39.35% | No change |
| Dividend allowance | £500 | £500 | No change |
Source: HMRC, Tax on dividends. Autumn Budget 2025 confirmed the 2026/27 increase.
The dividend allowance
The first £500 of dividend income per tax year is tax-free under the dividend allowance. This applies on top of your personal allowance (£12,570). Note that the allowance has been reduced significantly in recent years: it was £5,000 in 2017/18, fell to £2,000 in 2018/19, and dropped to £1,000 in 2023/24 before falling further to £500 from 2024/25 onwards.
For a director paying themselves a combination of salary and dividends, the first £500 of dividends above the personal allowance is always tax-free.
How dividends are taxed
Dividends sit on top of other income in your tax calculation. Salary and other income use up the income tax bands first, and dividends are then taxed in the remaining space.
Personal allowance used by salary: £12,570 (all tax-free)
Dividend allowance: £500 (tax-free)
Remaining dividends: £29,500 in basic rate band
Dividend tax: £29,500 x 10.75% = £3,171.25
Total income = £42,570. Total tax = £3,171.25. Effective rate = 6.1%.
Compare this to the same income drawn entirely as salary:
Income tax on £42,570: (£42,570 minus £12,570) x 20% = £6,000
NI on salary: approximately £2,394
Total: £8,394. Effective rate = 19.7%.
The salary plus dividends structure saves approximately £5,813 per year.
This is the core reason most limited company directors use a low salary and high dividend structure.
Dividend Tax Calculator
Calculate your exact dividend tax for any income level and distribution mix.
The optimal director salary for 2026/27
The widely recommended approach for 2026/27 is:
Pay no income tax on salary. No employee NI is triggered below £12,570.
For 2026/27, the secondary threshold is £5,000 per year and the primary threshold is £12,570 per year.
Setting salary at £12,570:
- Employee NI: nil (primary threshold = £12,570, so no NI owed)
- Employer NI: (£12,570 minus £5,000) x 15% = £1,135.50 per year
The employer NI cost is deductible against corporation tax, so the net cost is reduced. For a director whose company has profits below £250,000 (19% corporation tax rate), each £100 of employer NI costs the company only £81 net after the corporation tax deduction.
Setting salary at £9,100 eliminates employer NI entirely. Salary is deductible against corporation tax. No employee NI either (below primary threshold).
This is sometimes recommended for companies with very low profits where the corporation tax saving from a higher salary deduction is minimal.
The optimum salary level depends on your exact profit level and the Employment Allowance position. See the Limited Company Tax Calculator for the calculation specific to your profit level.
The impact of the April 2026 rate rise
The 2% increase from April 2026 has a real cash impact on directors drawing dividends regularly. For a director extracting £30,000 of dividends annually:
| Tax year | Dividend tax payable | Annual increase from 2026/27 |
|---|---|---|
| 2025/26 | £2,581.25 | Baseline |
| 2026/27 | £3,171.25 | +£590.00 |
For directors drawing £50,000 in dividends, the annual increase is approximately £1,000. For those extracting higher amounts near the upper earnings limit, the increase is even more significant.
Expert Tip
If you have retained profits in your limited company, consider whether it makes sense to draw extra dividends before 5 April 2026 to lock in the lower 10.75% rate on basic rate dividend income. A director with £20,000 of additional dividends would pay £2,150 at the 2026/27 rate of 10.75%, rather than £1,750 at the old 8.75% rate, saving £400. Check with your accountant that drawing the dividends does not trigger a higher rate charge by pushing total income above £50,270.
Dividend tax and ISAs
Dividends received within a Stocks and Shares ISA are completely free from dividend tax, regardless of the amount. For investors holding income-generating shares or funds, an ISA is the optimal wrapper. The annual ISA allowance is £20,000 for 2026/27. With dividend tax rates rising from April 2026, the value of sheltering dividend-producing investments inside an ISA increases.
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Frequently Asked Questions
£500. The first £500 of dividend income above the personal allowance is tax-free. This applies to both company directors paying themselves dividends and investors holding shares.
The 2% rate increase applies from 6 April 2026 (the start of the 2026/27 tax year). Dividends drawn on or before 5 April 2026 are taxed at current 2026/27 rates.
No. Dividends are not subject to National Insurance contributions, for either the director or the company.
Yes, if your dividend income exceeds the £500 allowance. You report dividends through your self-assessment tax return.
Many directors set salary at £12,570 (the personal allowance) to pay no income tax or employee NI, then take remaining profits as dividends. Alternatively, £9,100 avoids employer NI entirely if profits are low.
With salary at £12,570 using the personal allowance, £500 falls in the dividend allowance tax-free, and £29,500 is taxed at 10.75%, giving dividend tax of £3,171.25.
No. Dividends received inside a Stocks and Shares ISA are completely free from dividend tax regardless of amount. The ISA allowance is £20,000 for 2026/27.
For 2026/27, dividends above the £500 allowance are taxed at 39.35% for additional rate taxpayers (income above £125,140). This is on top of any corporation tax already paid on company profits before dividends are declared.
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James Hartley is a CIMA qualified financial analyst and Founder and Lead Financial Analyst at WhatsUK, with 8+ years in UK tax, payroll, and compliance. He builds every calculator on WhatsUK and authors all editorial content, ensuring every figure is verified against official HMRC sources before publication.
Sources & Official References
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Disclaimer: This calculator provides estimates based on standard HMRC rates for 2026/27. Results may vary based on individual circumstances. This is not financial advice. Always consult a qualified accountant or CIMA-qualified financial adviser for personal tax matters.