Do You Pay Tax on Dividends in the UK? Complete Guide

Dividends remain one of the most common ways to take income in the UK, particularly for limited company directors and long-term investors. While dividends are often described as tax efficient, the rules around dividend tax have become stricter in recent years. Changes to allowances and rates mean people now pay more tax on dividends in the UK than ever before.

With the Autumn Budget introducing higher dividend tax rates, understanding how dividends are taxed is no longer optional. A small misunderstanding can lead to underpaid tax, penalties, or poor planning decisions.

What are dividends?

Dividends are payments made to shareholders from the profits of a company after corporation tax has been paid. They represent a share of the business’s earnings and are often used by directors of limited companies to take income more tax efficiently than through a salary. Dividends can also come from shares held as investments. 

How Do You Pay Dividend Tax?

Unlike salary, which is taxed automatically through PAYE, dividend tax is paid through your Self Assessment tax return. This means HMRC does not deduct tax at source when you receive dividends. Instead, you are responsible for reporting them yourself.

At the end of the tax year, you must declare the total dividends received, after any available allowances, on your Self Assessment return. HMRC then calculates how much tax is due based on your total taxable income and the tax band you fall into. Once calculated, the tax is paid directly to HMRC, usually by 31 January following the end of the tax year.

Many business owners rely on Reflex Accounting to ensure their dividends are reported accurately, on time, and in the most tax-efficient way.

Do we pay National Insurance on Dividends?

The main tax advantage of dividends is that they are not subject to National Insurance Contributions (NICs). This can result in a significant saving compared to taking all your income as a salary. For example, in the 2025/26 tax year, employee NICs are charged at 8% on earnings between £12,570 and £50,270, and 2% on earnings above £50,270. Dividends completely avoid these charges.

Because of this, many limited company owners choose to take a small, tax-efficient salary and top up the rest of their income with dividends. When planned correctly, this combination can help reduce overall tax while staying fully compliant with HMRC rules.

Understanding Your Dividend Allowance

Every UK taxpayer receives a dividend allowance each tax year. This allowance currently stands at £500, meaning the first £500 of dividend income you receive is taxed at 0%. The allowance applies to all dividends you receive from UK.

Example Table: Dividend Allowance

What this means: Even if your total income is high, the first £500 of dividends are tax-free. It is important to track all dividend payments to avoid unnecessary tax.

How Dividends Are Paid: The Procedure

Dividends are payments made to shareholders from the profits of a company after corporation tax. They are not the same as salaries and must follow a legal process. Paying dividends correctly is crucial to avoid HMRC challenges and ensure tax compliance.

For limited company directors, the procedure typically involves the following steps:

1. Check Retained Profits
   Before paying dividends, directors must ensure the company has sufficient retained profits. Dividends cannot be paid from future profits or borrowed money. Retained profits are the accumulated earnings left after all expenses and corporation tax have been paid.
   
2. Declare the Dividend
   A formal board meeting or resolution is usually required to declare the dividend. Even for single-director companies, a written record of the declaration should be kept. This ensures the dividend is legal and HMRC-compliant.
   
3. Issue Dividend Vouchers
   Each shareholder must receive a dividend voucher, showing the company name, shareholder name, the amount of dividend, and the date of payment. Dividend vouchers are essential records for HMRC and must be retained for at least six years.
   
4. Make the Payment
   Dividends are typically paid directly into the shareholder’s bank account. They can be paid in cash or via bank transfer. The amount paid must match what was declared and recorded in the dividend voucher.
   
5. Record in Accounting System
   The payment should be entered into the company’s accounting records and reflected in the Balance Sheet. Accurate records help when filing corporation tax returns and during HMRC inspections.

What salary and dividend mix is most tax efficient?

For most limited company directors, taking a small salary and the rest as dividends usually means paying less tax overall. This is because salary attracts Income Tax and National Insurance, while dividends do not attract National Insurance and are taxed at lower rates

Total income taken: £50,270

Final outcome

Why this works

• Your salary uses your Personal Allowance, so no income tax is paid
  
• Your £500 dividend allowance is tax-free
  
• Remaining dividends stay within the basic-rate band and are taxed at a lower rate
  
• No National Insurance is paid on dividends
  

This structure allows many limited company directors to maximise take-home pay while staying fully compliant with HMRC rules.

Calculating Dividend Tax: 2025/26 vs 2026/27 (Updated Autumn Budget Rates)

After allowances, dividends are taxed at specific rates. The Autumn Budget 2025 increased dividend tax rates by 2% across all bands. For comparison, here are the rates for the last tax year and the coming year:

Worked Example: Director Salary + Dividends Exceeding Basic Rate

• Salary: £12,570
  
• Dividends: £45,000
  

Step-by-step calculation (2026/27):

1. Dividend allowance: £500 → taxed at 0%
   
2. Personal allowance: £12,570 of salary uses full personal allowance → salary tax = 0%
   
3. Remaining dividends: £45,000 – £500 (dividend allowance) = £44,500
   
4. Remaining basic rate band: £50,270 – £12,570 (salary) = £37,700
   
5. Tax at basic rate (10.75%) on first £37,700 of dividends: £37,700 × 10.75% = £4,052
   
6. Remaining dividends above basic rate: £44,500 – £37,700 = £6,800
   
7. Tax at higher rate (35.75%) on remaining £6,800: £6,800 × 35.75% = £2,429
   

Total dividend tax due: £4,052 + £2,429 = £6,481

Comparison with 2025/26 rates:

• Basic rate (8.75%) on £37,700 = £3,296
  
• Higher rate (33.75%) on £6,800 = £2,295
  
• Total tax = £5,591
  

What this means: Dividends above the basic rate band quickly increase your tax bill. The Autumn Budget increase means taxpayers paying higher-rate dividend tax now face a larger liability. Planning your dividends across the tax year and using allowances efficiently is key to reducing tax.

Dividends for Limited Company Directors

Limited company directors commonly use a combination of salary and dividends to optimise tax. Dividends can only be paid from retained profits, which are profits left after corporation tax. Paying dividends without retained profits is illegal and can trigger HMRC penalties. Directors must also issue dividend vouchers for every payment as part of statutory company records.

Example Table: Director Dividends and Tax

Explanation:

• Dividend allowance (£500) is tax-free
  
• Remaining dividends: £37,700 – £500 = £37,200
  
• Tax applied at updated 2025/26 basic rate (10.75%) for the first part, with any excess going into higher rate if total income exceeds £50,270

Why Are Dividends More Tax Efficient?

As mentioned earlier. dividends are considered more tax efficient than salary mainly because they do not attract National Insurance Contributions (NICs). With salary, both the employee and the company pay NICs, which can significantly increase the overall tax cost. Dividends completely avoid this, making them a cheaper way to extract profits from a limited company.

In addition, dividends are taxed at lower rates than salary income, once allowances are taken into account. Because of this, many limited company owners combine a small, tax-efficient salary with dividends to reduce their overall tax bill.

Key benefits of taking dividends include:

• No employee or employer National Insurance to pay
  
• Lower tax rates compared to salary income
  
• Flexibility to control when and how much income you take
  
• Ability to use personal and dividend allowances efficiently
  
• Improved cash flow through smarter profit extraction
  
• Opportunity to split dividends with a spouse or family member who holds shares in the business, potentially reducing overall tax if they are in a lower tax band
  
• A compliant and HMRC-approved way to maximise take-home pay when planned correctly

Take Action on Dividend Tax with Reflex Accounting

Dividends can be a tax-efficient way to take income, but recent increases in dividend tax rates make careful planning essential. At Reflex Accounting, we help business owners and investors understand their dividend allowance, personal allowance, and how updated rates affect their tax. Whether you are a company director paying yourself dividends from retained profits or an investor managing shares outside ISAs, our team can calculate your exact tax liability, optimise your payments, and ensure compliance with HMRC. Don’t risk overpaying tax or facing penalties get professional guidance and take control of your dividend strategy today.

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