What is Dividend Tax?
Dividend tax is what you pay on income from shares — 8.75% (basic), 33.75% (higher) or 39.35% (additional rate) above a £500 allowance. 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 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.
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 2025/26 unless stated. Last reviewed 5 July 2026.
Frequently asked questions
How much tax do I pay on dividends?
Above the £500 allowance: 8.75% within the basic band, 33.75% in the higher band, 39.35% above £125,140. Dividends inside ISAs and pensions are tax-free.
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 the gap has narrowed sharply — and Reform's proposed 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.