For limited company owners, there’s an important distinction to make from the outset. Your company doesn’t pay dividend tax when it distributes profits. It pays Corporation Tax on its profits first. Then, when those post-tax profits are paid to you as dividends, you may have personal tax to pay. Dividends aren’t a Corporation Tax-deductible business expense.
In this guide, we explain how tax on dividends works in the UK in 2026/27, how the allowances and tax bands interact and when company directors have to pay it. We also explain how to report dividend income to HMRC, and when dividends can legally be taken from a limited company.
Key takeaways
- Dividend tax is Income Tax that shareholders pay personally – not the company.
- Dividends come from post-tax profits and aren’t deductible for Corporation Tax.
- What you pay depends on your total income and which tax bands your dividends fall into.
- For 2026/27, the rates are 10.75%, 35.75% and 39.35%, with a £500 tax-free allowance.
What is dividend tax?
The phrase ‘dividend tax’ is commonly used, but it’s not a completely separate tax in the way that Corporation Tax is. Dividends are a form of income. Unless they’re held in an ISA or pension, they’re taxed at special dividend rates once your tax-free allowances are used up.
This is particularly relevant to directors of small limited companies. Being a director doesn’t entitle you to dividends. You only receive them if you’re also a shareholder with dividend rights. In other words, dividends are paid to you as a shareholder – not as a director or employee.
Do company directors pay tax on dividends?
Yes – if a director is also a shareholder and receives taxable dividends, they may have to pay personal dividend tax. How much depends on their total income, available Personal Allowance, £500 dividend allowance and the tax bands into which their dividends fall.
The same rules apply if you receive dividends from investments held outside an ISA or pension – even if you have nothing to do with running the company.
Can sole traders pay themselves dividends?
Sole traders are different. Dividends are distributions made by companies to their shareholders, so a sole trader can’t pay themselves a dividend from their sole trader business. A limited company is a separate legal entity, whereas a sole trader and their business are legally the same. If you’re considering incorporation, see our guide on how to change from sole trader to limited company.
Dividend tax rates and allowances for 2026/27
The UK dividend tax rates for the tax year running from 6 April 2026 to 5 April 2027 are:
| Tax band | Dividend tax rate for 2026/27 |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
These rates apply to dividend income above the relevant tax-free allowances. The basic and higher dividend rates both increased by two percentage points from 6 April 2026: the basic rate rose from 8.75% to 10.75%, while the higher rate rose from 33.75% to 35.75%. The additional rate remains at 39.35%. Scottish taxpayers pay the same dividend rates – Scottish Income Tax rates only apply to non-savings income, such as salary.
There are two allowances to understand when calculating tax on dividends:
1. Personal Allowance
The Personal Allowance is £12,570 for 2026/27. This is the amount of income most people can receive before they start paying Income Tax. Dividend income can use any part of your Personal Allowance that hasn’t already been used by salary or other income. The Personal Allowance starts to reduce by £1 for every £2 of adjusted net income above £100,000 and can eventually be reduced to nil.
2. Dividend allowance
The dividend allowance is £500 for 2026/27. It allows £500 of dividend income to be taxed at 0%. Importantly, it doesn’t remove that £500 from your total income for tax purposes. Dividends covered by the allowance still occupy space within your tax bands, which can affect the rate charged on dividends above the allowance.
For example, say dividends are your only income, and you get the full £12,570 Personal Allowance. This would mean you could ordinarily receive £13,070 in dividends in 2026/27 before any dividend Income Tax became payable: £12,570 would be covered by the Personal Allowance and £500 by the dividend allowance.
For more detail on how the £500 allowance works, see our guide to the UK dividend allowance for 2026/27.
How are dividends taxed?
To calculate how much tax you pay on dividends, you can’t look at the dividend payment in isolation. To work out which tax band applies, add your total dividend income to your other income. Dividend income is generally treated as the top slice of your income.
For 2026/27, the standard Personal Allowance is £12,570 and the basic-rate band covers the first £37,700 of taxable income after allowances. For someone entitled to the full Personal Allowance, this normally means the higher-rate threshold is reached when total income exceeds £50,270. However, your exact position can be affected by factors like a reduced Personal Allowance or other reliefs.
In simple terms, the calculation works like this:
- Add together your taxable sources of income, including salary and dividends.
- Apply any available Personal Allowance.
- Establish how much of each tax band has already been occupied by your other income.
- Apply the £500 dividend allowance to dividend income.
- Tax the remaining dividends at 10.75%, 35.75% and/or 39.35%, depending on where they fall.
Because dividends sit above most other income in the tax calculation, you can pay more than one dividend tax rate in the same year. For example, part of a dividend could fall within the basic-rate band and the remainder within the higher-rate band.
Example: Simon receives a £20,000 salary and £60,000 in dividends
Assume Simon has no other income, receives the full Personal Allowance and is subject to the main Income Tax rates applicable in England, Wales and Northern Ireland. His total income is £80,000.
After his £12,570 Personal Allowance is applied against his salary, £7,430 of salary is taxable. That uses £7,430 of the £37,700 basic-rate band, leaving £30,270 of that band available for his dividends. The first £500 of his dividend income is covered by the dividend allowance but still occupies part of the tax band.
His dividend tax calculation is therefore:
| Simon’s dividend income | Rate | Tax |
|---|---|---|
| £500 dividend allowance | 0% | £0 |
| £29,770 within basic-rate band | 10.75% | £3,200.28 |
| £29,730 within higher-rate band | 35.75% | £10,628.47 |
| Total dividend tax | £13,828.75 |
Simon would also pay £1,486 of Income Tax on his salary. Based on the 2026/27 employee National Insurance thresholds and rates, his employee National Insurance would be £594.40, giving combined personal Income Tax, dividend tax and employee National Insurance of approximately £15,909. The employee National Insurance rate is 8% between the Primary Threshold and Upper Earnings Limit in 2026/27, falling to 2% above the Upper Earnings Limit.
Example: Lesley receives a £60,000 salary and £20,000 in dividends
Lesley also has £80,000 in total income, with the same assumptions as Simon. However, her £60,000 salary has already used the whole basic-rate tax band before her dividends are considered.
The first £500 of her dividends is still taxed at 0%, but her remaining £19,500 of dividend income falls into the higher-rate band:
| Lesley’s dividend income | Rate | Tax |
|---|---|---|
| £500 dividend allowance | 0% | £0 |
| £19,500 within higher-rate band | 35.75% | £6,971.25 |
| Total dividend tax | £6,971.25 |
Lesley’s salary produces £11,432 of Income Tax and, based on the standard 2026/27 employee rates, £3,210.60 of employee National Insurance. Her combined personal Income Tax, dividend tax and employee National Insurance is therefore approximately £21,614.
Although Simon and Lesley each receive £80,000 of total income, they pay different amounts of tax because their income is made up differently. These examples show how dividend tax bands work. They’re not a guide to how much salary a director should take.
For the separate question of how to structure your remuneration, see our guide to the most tax-efficient director’s salary and dividends for 2026/27. It looks specifically at salary-and-dividend planning, whereas this guide focuses on the tax treatment of dividends themselves.
Source: Budget 2025: Overview of tax legislation and rates (OOTLAR)
Are dividends tax deductible?
No. Dividends aren’t tax-deductible for a limited company.
It’s easy to get confused here, because salaries and some other business costs can be deducted from your company’s taxable profits. Dividends are different: they’re distributions of profit, not expenses incurred in earning it. That’s why they can’t be deducted when working out the company’s taxable profits.
In practical terms, a company normally earns profits, calculates and pays any Corporation Tax due, and may then distribute available post-tax profits to shareholders as dividends. Paying a larger dividend doesn’t reduce the profit on which the company pays Corporation Tax.
The company doesn’t pay ‘dividend tax’ on the payment either. Any dividend tax is paid by the shareholder who receives it.
This distinction is particularly important for owner-managed businesses: company profits and the shareholder’s personal dividend income are taxed at different stages and under different rules.
Are dividends from ISAs and pensions taxable?
Not all dividends are subject to dividend tax:
1. ISAs
Dividends from shares held within an ISA are tax-free. They don’t use your £500 dividend allowance, and you don’t pay dividend Income Tax on them, however much you receive.
2. SIPPs
Dividends received within a Self-Invested Personal Pension (SIPP) or another registered pension scheme are also exempt from Income Tax while held within that pension structure.
This matters for personal investors because the £500 dividend allowance only applies to dividend income held outside these tax-advantaged wrappers. Someone receiving investment dividends entirely within an ISA, for example, doesn’t need to use the £500 dividend allowance against those ISA dividends.
For director-shareholders, however, dividends paid directly to you from shares you personally hold in your own limited company are normally outside an ISA or pension wrapper. They therefore form part of your personal dividend income and must be considered alongside your other taxable income.
When can you take dividends from a limited company?
A limited company can’t pay dividends simply because there’s money in its bank account. Dividends can only be paid from available profits and must be properly declared and recorded.
Dividends can be paid at any point during the year, provided sufficient profits are available, and the company follows the required procedures. Many owner-managed companies pay dividends several times a year. Before declaring each one, check that the company’s accounts show enough profit to cover it.
When should I not take dividends out of my company?
A dividend can be unlawful if the company distributes more than its available profits or fails to follow the correct process. Where a director-shareholder takes money as a dividend without sufficient profits, the amount will usually need to be repaid and may be treated as a director’s loan. If the company later becomes insolvent, the consequences can be more serious. They can include repayment demands, personal liability and, in some cases, director disqualification.
Keep proper records whenever you declare a dividend. That paperwork matters – calling a payment a dividend doesn’t make it one.
Review your up-to-date company accounts before declaring a dividend, particularly when profits are fluctuating or when previous profits and losses need to be taken into account.
How do you report and pay dividend tax?
One of the most important points to understand is that receiving less than £10,000 in dividends doesn’t automatically mean there’s nothing to report to HMRC.
If you have dividend tax to pay, you must tell HMRC about the dividend income each year. If you already complete a Self Assessment tax return, you must include your dividend income on that return.
Where your dividend income is up to £10,000 and you don’t normally complete Self Assessment, you don’t necessarily have to register for a tax return just because of those dividends. However, if tax is due, you must tell HMRC after the end of the tax year and before 5 October. You can do this by asking HMRC to update your tax code or by calling the Income Tax helpline.
So, for dividends received during the 2026/27 tax year ending 5 April 2027, someone who needs to notify HMRC under these rules would normally need to do so by 5 October 2027.
If your dividend income is over £10,000, you’ll need to file a Self Assessment tax return. If you don’t already file one, register for Self Assessment by 5 October after the end of the tax year.
In short, if your dividends are £10,000 or less, you only need to tell HMRC about any that aren’t covered by your unused Personal Allowance and £500 dividend allowance. If you already complete Self Assessment for another reason, however, include your dividend income on the return.
Source: HMRC – How to report tax on dividends
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Keeping dividend records
Keeping accurate dividend records can therefore be just as important as calculating the rate itself. For a director-shareholder, the calculation may involve company profits and dividend records on one side, and salary, other personal income, allowances, and Self Assessment on the other.
For each dividend, keep the board minutes declaring it, a dividend voucher for each shareholder, and the accounts showing there were enough profits to pay it. Keep board minutes for at least 10 years. Other company records normally need to be kept for six years from the end of the financial year.
This is one area where an accounting service can be particularly useful. 1st Formations’ Accounting Service supports limited companies with year-end accounts and Corporation Tax returns, while relevant service plans also cover areas like payroll and a director’s Self Assessment. Dealing with these together makes it easier to keep your company records and personal tax reporting aligned.
Professional advice is especially worthwhile where you have:
- Multiple income sources
- A reduced Personal Allowance
- Different share classes
- Significant investment income
It’s also worth getting professional advice if you’re not sure whether your company has enough profit to pay a dividend.
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