The dividend allowance is the slice of dividend income you can receive each tax year without paying dividend tax on it. For 2026/27 it is £500, the same figure as the two years before. What has changed is the tax you pay on dividends above that allowance: the rates rose on 6 April 2026, so the same dividends now cost more than they did last year. If you pay yourself partly in dividends, both numbers matter.
This guide explains what the allowance covers, how it has shrunk since 2022, the new rates that apply from April 2026, and the legitimate ways a director can take dividend income with less tax. The figures here are for the 2026/27 tax year.
Key takeaways
- The allowance is £500. You pay no dividend tax on the first £500 of dividends in 2026/27.
- It is an allowance, not an exemption. The £500 still uses up part of your tax band, it is simply taxed at 0%.
- Rates rose in April 2026. Basic rate is now 10.75%, higher rate 35.75%, and additional rate 39.35%.
- Dividends sit on top. They are treated as the top slice of your income, so other earnings decide which rate applies.
- You can shelter more. A stocks and shares ISA, pension contributions and a genuine spouse shareholding all reduce the dividend tax bill.
Not sure how much to take this year? Book a free 15-minute business call and we will work out a salary and dividend split that fits your figures.
Book a video call or a call back. We will model the split against the 2026/27 allowance and rates, and show you how much to take at the lowest total tax.
Saved for one client over five years by bringing a spouse in as a genuine shareholder. A reported past outcome, not a promise.
What the dividend allowance actually is
The dividend allowance is the amount of dividend income taxed at 0% before the dividend rates begin. For 2026/27 that amount is £500. It applies to dividends from your own company and from any shares or funds you hold personally, all added together.
The allowance does not remove the income from your tax position, it only charges it at 0%. The £500 still counts towards your total income and still uses up part of whichever band you are in. That matters when dividends push you close to the £50,270 higher-rate threshold, because the allowance fills the band even though no tax is due on it.
How the allowance has shrunk since 2022
The allowance used to be far more generous. It was £2,000 in 2022/23, then halved to £1,000 in 2023/24, then halved again to £500 from 2024/25, where it has stayed for 2025/26 and 2026/27. In three years the tax-free slice has dropped by £1,500, so a director taking the same dividends now has £1,500 more of them taxed than in 2022/23. Combined with the rate rise in April 2026, dividend income is meaningfully more expensive than it was, which is exactly why the salary and dividend split is worth getting right.
The dividend tax rates from April 2026
Above the £500 allowance, the rate you pay depends on the tax band your dividends fall into. At the Autumn 2025 Budget the basic and higher rates were increased from 6 April 2026:
In cash terms, every £1,000 of dividends above the allowance now costs a basic-rate taxpayer £107.50 and a higher-rate taxpayer £357.50. Last year those figures were £87.50 and £337.50, so the rise adds £20 per £1,000 at both levels. The gap between the basic and higher rate is 25 percentage points, which is why so much of our planning work is about keeping a director's total income under £50,270 where the business allows it.
Illustrative for a UK-resident director on the 2026/27 rates. Salary uses the personal allowance first, then dividends stack on top through the £500 allowance and the dividend bands. Assumes no other income and no pension contribution. Not a substitute for advice.
Dividends are the top slice of your income
Dividends are always treated as the highest part of your income, stacked above your salary and any other earnings. That order decides which rate applies. The same dividend can be taxed at 10.75% for one director and 35.75% for another, purely because of the income sitting underneath it. We work through that interaction in our guide to salary versus dividends.
This is why the salary you take first is so important. A typical owner-director draws a salary around the personal allowance of £12,570, then takes the rest as dividends. The salary uses the personal allowance, and the dividends then fill the basic-rate band up to £50,270 before any higher-rate charge begins.
Worked example: dividends inside the basic band
Take a director with a £12,570 salary and £37,700 of dividends, giving total income of £50,270, right at the higher-rate threshold. The salary is covered by the personal allowance. Of the dividends, the first £500 falls within the dividend allowance and is taxed at 0%. The remaining £37,200 sits in the basic-rate band at 10.75%, which is £3,999. So a little under £4,000 of dividend tax on £37,700 of dividends, with no higher-rate charge because nothing crosses £50,270.
Worked example: dividends crossing into higher rate
Now take the same £12,570 salary but £50,000 of dividends, total income £62,570. The first £500 is tax free. The next £37,200 fills the basic band at 10.75%, which is £3,999. The remaining £12,300 of dividends sits above £50,270 and is taxed at the higher rate of 35.75%, which is £4,397. Total dividend tax is about £8,396. The jump shows how sharply the cost rises once income crosses the threshold, and why pension contributions or timing across two tax years can be worth planning.
A client result: £32,187 saved over five years
One of our clients, an online manufacturer and retailer of high-end musical instruments in the Bristol area, was already a higher-rate taxpayer drawing everything himself. On our ongoing advice he brought his life partner into the business as a shareholder, so dividends could be paid to her each year as well.
Over five years she has drawn £125,000 from the business, taxed at the basic rate rather than the higher rate he would have paid on the same money. The combined tax saving came to £32,187. Because we hold real-time information on the client's finances, we could calculate the position immediately at year end and tell him exactly how much could be drawn to make the most of it, then put the share structure, legal documents and dividend paperwork in place within a few weeks, checked against what the business could actually afford.
The money went straight into the mortgage on their newly bought home, which has saved them thousands more in interest over the same five years. We used chartered tax advisers and specialist corporate lawyers to make sure every document was drawn up correctly, so there is no exposure if HMRC ever reviews the arrangement.
Ways to take dividend income with less tax
Within the rules, there are a few legitimate routes that reduce dividend tax rather than avoid it.
Use a stocks and shares ISA
Dividends on investments held inside an ISA are tax free and do not use your £500 allowance. The annual ISA limit is £20,000. An ISA does not help with dividends from your own trading company, but it shelters your wider portfolio. We set out where an ISA helps a director and where it does not in our guide on ISA tax planning for directors.
Make pension contributions
Employer pension contributions from your company are usually an allowable expense, reduce profit before corporation tax, and are not dividends, so they sidestep dividend tax entirely. They also bring down your personal income, which can keep more of your dividends inside the basic band. The mechanics are in our guide on using pensions in a business tax plan.
The difference is worth seeing in pounds. Take £100 of company profit. Pay it out as a dividend to a higher-rate director and the company pays corporation tax at 25% first, leaving £75, then the director pays 35.75% dividend tax on that £75, which is £26.81. The director keeps £48.19, so roughly 52% of the original profit has gone in tax. Put the same £100 into a pension as an employer contribution and the full £100 lands in the pension, with no corporation tax and no dividend tax on the way in. Tax is deferred to when you draw the pension, where 25% is normally tax free and the rest is taxed at your marginal rate then.
Split shares with a spouse
Where a spouse or civil partner genuinely owns shares in the company, each person has their own £500 allowance and their own basic-rate band. This can move dividend income off a higher-rate taxpayer and onto someone with unused band. It has to be a real shareholding with real rights, not a paper arrangement, so it needs setting up correctly.
There is a helpful rule when the company is already trading. Transfers between spouses and civil partners who live together are treated as made on a no gain, no loss basis for capital gains tax, so bringing a spouse in as a shareholder does not usually trigger a capital gains charge on the transfer itself. Where an arrangement falls outside that treatment, gift holdover relief can sometimes apply instead. Both are technical, and the right route depends on how the shares are created and what rights attach to them, so confirm the position with a tax adviser before any paperwork is signed.
If HMRC concludes that shares were put in a spouse's name purely to move income, with no genuine involvement or real rights attached, the settlements legislation can tax the dividends back on the original owner. The exemption that protects most couples covers outright gifts of ordinary shares carrying full rights, which is precisely why the share class and the documentation matter so much. Always check this before you arrange to pay a spouse by dividend.
Time dividends across tax years
Because the allowance and the bands reset each 6 April, splitting a large dividend across two tax years can keep more of it in the basic band. The dividend is taxed in the year it is declared and made available, so the timing of the board minute matters.
Picking the right combination is what our tax planning service is for. We model the salary, dividends and pension together so you take what you need at the lowest total tax, and keep your personal tax return clean.
"After phone consultation I've saved a few thousand pounds. Excellent service, very helpful and friendly people."
Lukasz C., e-commerce client, February 2020Are you taking dividends the tax-efficient way?
Five short questions on how you draw dividends. At the end you will get an honest read on whether your split is fine or worth a look under the 2026/27 allowance and rates. Either way, the next step is a free 15-minute call.
Dividends are one piece of it. See how we plan the books, the reporting and the tax for directors across the whole year.
One thing to watch: dividends and your loan account
Dividends can only be paid out of distributable profit. If money has been drawn from the company that profits do not cover, it is not a dividend at all, it is a loan, and it lands in your director's loan account. Personal costs paid from the business account are the usual culprit. Left unchecked, that balance can also push your total drawings over the basic-rate threshold without you noticing. Compare your dividend withdrawals against your loan account monthly, not in the following spring.
Related reading for directors
Salary versus dividends for directors
How to split your pay for the lowest total tax under the 2026/27 rates.
Read the article → Tax planningUsing pensions in a business tax plan
An efficient route past the dividend rates and the £100,000 taper.
Read the article → InvestingISA tax planning for directors
Where an ISA shelters your dividends, and where it cannot help.
Read the article →Frequently asked questions
How much is the dividend allowance for 2026/27?
It is £500. You pay no dividend tax on the first £500 of dividends in the tax year. This is the same figure as 2024/25 and 2025/26, down from £2,000 in 2022/23.
What are the dividend tax rates now?
From 6 April 2026 the rates are 10.75% on income within the basic band, from £12,571 to £50,270; 35.75% on income in the higher band, from £50,271 to £125,140; and 39.35% above £125,140. The first £500 is taxed at 0% under the allowance. Because the cheapest rate applies below £50,270, many directors ask us to plan the wage and dividend mix around that threshold.
Do dividends count towards the £50,270 threshold?
Yes. Dividends are part of your total income and are treated as the top slice. Even the £500 covered by the allowance uses up part of your band, so dividends can push you over the higher-rate threshold.
Are ISA dividends covered by the allowance?
No, and they do not need to be. Dividends on investments held inside an ISA are tax free in their own right and do not use any of your £500 allowance, which is then free for dividends held outside the ISA.
Can my spouse use a dividend allowance too?
Yes, if they genuinely own shares in the company. Each shareholder has their own £500 allowance and their own tax bands, so spreading a real shareholding can use two sets of allowances. The shareholding has to be genuine, with proper rights, and the paperwork needs to be right.
Get your dividends planned, not guessed
Total Books Accountants Ltd is a regulated, founder-led practice of limited company accountants, led by Buhir Rafiq with more than 30 years in accounting and finance. We are AAT licensed, an HMRC registered tax agent, a Companies House authorised agent and a Xero Certified Advisor, working from offices in Cardiff, Newport and Bristol and UK-wide through our Virtual Finance Office with secure digital onboarding.
Book a free 15-minute business call and we will run the numbers with you.
This guide is general information, not advice for your specific situation. Tax rules and rates change, and the right split depends on your circumstances. The client result described is a past outcome for one client and is not a promise of the same result for you. Completing your returns remains the responsibility of the taxpayer; please take professional advice before acting.
