Dividends have their own tax rules, lower than the rates on salary, but they stack on top of your other income. Here is the £500 allowance, the three dividend rates, a worked example, and the legitimate ways to pay less.
Everyone gets a tax-free dividend allowance of £500 for 2026/27. The first £500 of dividends you receive in the year is tax-free. It's much smaller than it used to be (it was £2,000 as recently as 2022/23), so most people with shares outside an ISA now pay some dividend tax.
Above the allowance, the rate depends on which Income Tax band the dividends fall into:
| Band | Dividend rate |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
These are noticeably lower than the 20%, 40% and 45% you'd pay on the same amount as salary, which is part of why dividends are attractive.
Dividends are treated as the top slice of your income. Your salary and other income use up your personal allowance and tax bands first; the dividends then sit on top and are taxed at the dividend rate for wherever they land. That means one dividend payment can be taxed partly at 10.75% and partly at 35.75%.
Salary £40,000, dividends £5,000: the first £500 is tax-free, leaving £4,500. It all sits in the basic-rate band, so the tax is 10.75% of £4,500 = £484.
The same £5,000 as a higher-rate taxpayer would be taxed at 35.75%, costing about £1,609.
Enter your salary and dividends to see the tax, the split across the 10.75%, 35.75% and 39.35% bands, and what you keep.
Open the Dividend Tax calculator →Dividends carry no National Insurance, unlike salary. That's the main reason many company directors take a small salary, often around the personal allowance, and draw the rest of their income as dividends: they skip employee and employer National Insurance and pay the lower dividend rates. The company pays Corporation Tax on its profits first, so it isn't tax-free money, but the combination is often cheaper than a pure salary.
After the £500 allowance, 10.75% (basic), 35.75% (higher) or 39.35% (additional), depending on your total income for 2026/27.
£500 for 2026/27. The first £500 of dividends is tax-free, but still counts towards your income for band purposes.
No. Dividends are free of NI, which is why directors often mix a small salary with dividends.
Hold shares in an ISA, use your allowance, share holdings with a spouse, and consider pension contributions.
Illustrative and educational only, not financial or tax advice. Assumes England, Wales or NI rates, a standard tax code and dividends taxed as your top slice of income. Your circumstances change the result. Always check gov.uk or speak to an accountant.