Dividend Allowance UK 2025/26

Understand the UK dividend allowance for 2025/26, tax rates, reporting rules, and how to reduce your tax bill on dividends efficiently.

Dividend Allowance 2025/26: Everything You Need to Know

The UK dividend allowance is a crucial part of personal tax planning, especially for investors, company directors, and business owners who pay themselves in dividends. In this article, we’ll break down the dividend allowance for the 2025/26 tax year, how it works, how much it is, and what you can do to use it wisely.

What Is the Dividend Allowance?

The dividend allowance is a tax-free amount you can earn from dividend income each year without paying any dividend tax. Dividends are distributions of a company’s profits to its shareholders—often paid quarterly or annually. If you own shares in a company (even your own), you can receive dividends on those shares.

The dividend allowance is not an additional tax-free band on top of your Personal Allowance. Instead, it means you don’t pay tax on dividend income up to the threshold, regardless of your total income. Above that threshold, dividend tax applies at rates depending on your income tax band.

What Is the Dividend Allowance for 2025/26?

For the 2025/26 tax year, the UK government has reduced the dividend allowance to £500. This is a sharp drop from previous years:

  • 2023/24: £1,000

  • 2024/25: £500

  • 2025/26: £500 (no further reduction at time of writing)

This cut means investors and company owners will pay more dividend tax on the same level of income than in previous years.

Are Dividends Still Tax Efficient?

Even with the reduced allowance, dividends can be more tax-efficient than taking a salary, especially for company directors or those with investment portfolios. Here’s why:

  • Dividends are not subject to National Insurance contributions.

  • The tax rates on dividends (even above the allowance) are lower than on employment income.

  • You still benefit from the Personal Allowance (£12,570 in 2025/26), which applies to your total income.

That said, the shrinking allowance makes it more important to plan carefully and explore other ways to reduce your liability.

What Are the Dividend Tax Rates for 2025/26?

Once you go over your £500 dividend allowance, the tax you pay depends on which income tax band you fall into. Here are the rates for 2025/26:

  • Basic Rate Up to £50,270: Dividend Tax Rate 8.75%

  • Higher Rate £50,271 – £125,140: Dividend Tax Rate 33.75%

  • Additional Rate Over £125,140: Dividend Tax Rate 39.35%

Note: These are the same rates as the previous tax year.

What Happens If My Dividend Income Crosses into a Higher Tax Band?

If your dividend income pushes your total income into a higher band, you’ll pay the higher dividend tax rate on the portion of dividend income in that band. For example:

  • If your salary is £45,000 and you receive £5,000 in dividends, £5,270 of your income falls into the basic rate band.

  • You’d pay:

    • 0% on the first £500 (dividend allowance)

    • 8.75% on the remaining £4,500 of dividends (still within basic rate)

If your total income climbs beyond £50,270, the excess will be taxed at 33.75%.

How Do I Declare Dividend Income to HMRC?

If your dividend income is under £10,000:

  • You can declare it via your Self Assessment tax return, or

  • Contact HMRC to adjust your tax code

If your dividend income is over £10,000, you must complete a Self Assessment tax return.

Make sure you include gross dividends (before any tax) and keep proper records, especially if they’re from multiple sources.

Are Dividends Taxed Differently from Salary Income?

Yes. Dividends are taxed separately from salary and don’t incur National Insurance. Salaries are subject to income tax and both employee and employer National Insurance contributions, which can be much higher overall.

For company directors, a common strategy is to take a low salary (within the Personal Allowance or NI thresholds) and the rest as dividends to reduce tax and NI liabilities.

How Can I Reduce My Dividend Tax Liability?

Here are a few strategies:

  1. Use your ISA allowance
    Dividends earned within an ISA are completely tax-free. For 2025/26, the ISA allowance is £20,000.

  2. Spouse or civil partner sharing
    You can transfer shares or split ownership if your partner is in a lower tax band, allowing you to make use of both allowances and lower tax rates.

  3. Maximise Personal Allowance
    Make sure you’re using the £12,570 personal allowance each year. If you have no salary or low income, dividends can soak up this tax-free income space.

  4. Time your dividends
    You can delay or accelerate dividends to stay within a tax band in a given year, especially useful near the end of a tax year.

  5. Use a family investment company or trust
    For larger portfolios, these structures can offer more control and efficiency, though they require specialist advice.

Recent Changes to Dividend Allowance: A Quick Recap

  • 2016/17 £5,000

  • 2018/19 £ 2,000

  • 2023/24 £1,000

  • 2024/25 £500

  • 2025/26 £500 (no change)

Since 2016, the government has consistently reduced the allowance, indicating a clear trend towards taxing dividends more heavily.

Final Thoughts

The dividend allowance may seem small in 2025/26, but it still plays an important role in tax planning. Whether you're a company director looking to draw income or an investor with a healthy share portfolio, understanding how dividends are taxed can help you keep more of your earnings. Make sure to use every available tax break, and if your dividend income is substantial, consider speaking to a tax adviser to ensure you're as efficient as possible.