Dividend Tax in the UK: Rates, Allowances and Smart Planning
If you own shares in a company — including your own limited company — dividends are likely the most tax-efficient way to take profits. But the tax-free allowance has shrunk dramatically in recent years, so planning matters more than it used to.
The dividend allowance
Everyone can receive a small amount of dividend income tax-free each year under the dividend allowance. The allowance is currently £500 — down from £5,000 when it was introduced in 2016. Dividends above the allowance are taxed according to which income tax band they fall into.
Dividend tax rates
- Basic rate: 8.75% on dividends within the basic rate band.
- Higher rate: 33.75% on dividends within the higher rate band.
- Additional rate: 39.35% on dividends in the additional rate band.
These rates are lower than the equivalent income tax rates on salary (20%, 40% and 45%), and dividends do not attract National Insurance. That combination is why the salary-plus-dividends structure remains popular with owner-directors.
A typical director strategy
A common approach is to pay a modest salary — often around the personal allowance of £12,570 or the National Insurance threshold — and take the rest of your income as dividends. The salary preserves your state pension entitlement and is deductible for Corporation Tax, while the dividends are taxed at the lower rates above.
The optimal split depends on your total income, other earnings, whether you have employment allowance available, and how much profit the company retains. There is no single right answer — this is exactly the calculation an accountant earns their fee on.
Rules you must not ignore
- Dividends can only be paid out of distributable profits. Taking dividends from a loss-making company can make them unlawful and repayable.
- Every dividend needs proper paperwork: a board minute declaring it and a dividend voucher for each shareholder.
- Dividends must be paid in proportion to shareholdings unless you have different share classes.
- Dividend income above £10,000 means you must file a Self Assessment return (below that, HMRC can often collect through your tax code).
