What is Dividend Tax?
Dividend tax is what you pay on income from shares — 10.75% (basic), 35.75% (higher) or 39.35% (additional rate) above a £500 allowance, after the 2-point rise in April 2026. It's the tax that defines how company owner-directors pay themselves.
How it works
Dividends stack on top of your other income and are taxed at their own rates — lower than salary rates because corporation tax (25%) was already paid on the profits. The November 2025 Budget raised the ordinary and upper rates by two points from April 2026: now 10.75% (basic band), 35.75% (higher band) and 39.35% (additional rate, unchanged). The tax-free dividend allowance has collapsed from £5,000 (2017) to £500, dragging hundreds of thousands of small investors into self-assessment. Shares inside ISAs and pensions pay nothing — and the same Budget raised tax on savings interest and rental income by two points from April 2027, part of a deliberate shift toward taxing unearned income.
The owner-director equation
Small company owners typically pay themselves a small salary plus dividends: no NI on dividends, but corporation tax first. At 25% corporation tax the old advantage has thinned dramatically — combined rates on extracted profits now rival employment. Reform's cut to 20% then 15% would tilt the maths back toward incorporation; add IR35 abolition and the one-person company becomes attractive again.
Why it matters now
Dividend taxation is where "taxing wealth like work" gets practical. The Green principle of aligning investment and work taxes points to higher dividend rates; Reform points the other way. Meanwhile the £500 allowance means a portfolio of barely £12,000 outside an ISA can now generate a tax return — the quiet argument for using your ISA wrapper first.
Plain-English guide for general information only — not financial, legal or tax advice. Rates are 2026/27 unless stated. Last reviewed 5 July 2026.
Frequently asked questions
How much tax do I pay on dividends?
Above the £500 allowance (since April 2026): 10.75% within the basic band, 35.75% in the higher band, 39.35% above £125,140. Dividends inside ISAs and pensions are tax-free.
Why did dividend tax go up in 2026?
The November 2025 Budget raised the ordinary and upper dividend rates by two percentage points from April 2026, alongside two-point rises on savings and property income from April 2027 — a deliberate shift toward taxing income from assets more like income from work.
Why do company directors pay themselves in dividends?
No National Insurance is due on dividends, so a small salary plus dividends historically beat pure salary. At 25% corporation tax and the higher 2026 dividend rates the gap has narrowed sharply — Reform's proposed corporation-tax cut to 15% would widen it again.
Do I need to declare dividends?
Above £500 outside tax shelters, yes — via self-assessment or (below £10,000) a tax-code adjustment. Frozen at £500, the allowance now catches quite modest portfolios.