How dividends are taxed
Updated 7 November 2026
The question with dividends is how much to draw and when. The number that decides it is £50,270: below that level of total income a pound of dividend costs you 10.75p in tax, and above it the next pound costs 35.75p.
Dividends come out of profit that has already paid corporation tax. They are then taxed again in your hands, at lower rates than salary and with no National Insurance. Nobody deducts that tax along the way, which is why it surprises people at self assessment.
The rates for 2026/27
10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% above that. The basic and higher rates both went up by two percentage points in April 2026.
The first £500 of dividends is taxed at 0%. That is the dividend allowance. For a contractor drawing £50,000 or more it barely registers, and it still uses up space in your bands, so it is not quite free.
How dividends stack on salary
Salary and other earned income go in first, and the £12,570 personal allowance shelters that first. Any allowance left over shelters dividends. The dividends then fill the bands from where the salary stopped.
The basic rate band covers the first £37,700 of taxable income. With a £12,570 salary you reach the top of it at £50,270 of total income. Higher rate runs from there to £125,140, and additional rate above that.
The take-home calculator’s worked example: salary £12,570, dividends £73,056.45. The salary uses the whole allowance. The first £500 of dividends is at 0%. The next £37,200 fills the rest of the basic rate band at 10.75%, which is £3,999. The remaining £35,356.45 sits in the higher rate band at 35.75%, which is £12,639.93. Total dividend tax is £16,638.93.
There is no gradient: the rate more than triples at £50,270. If your income is near that line, timing is where you save money.
The £100,000 taper
Once total income passes £100,000, your personal allowance shrinks by £1 for every £2 above it, and it is gone at £125,140. Dividends count towards that total.
So a dividend in that range is taxed at 35.75% itself and also exposes salary that was sheltered to tax at 20%. Each pound between £100,000 and £125,140 costs well above the headline rate. You can see the line flatten there in the take-home calculator.
Timing
Dividend tax is charged in the tax year the dividend is paid, and the tax year runs from 6 April to 5 April.
Spread dividends where you can. Every tax year brings a fresh £500 allowance and a fresh basic rate band, so two years of dividends kept under £50,270 each cost less than £100,000 in one year and nothing in the next. A company with uneven profits can still pay dividends evenly.
Or wait. Profit left in the company has already paid corporation tax and can sit there. Retaining it defers dividend tax, though it does not avoid corporation tax and the money stays the company’s until you draw it. If next year looks quieter, the dividend may land in a lower band then.
Traps
A dividend can only be paid from profit the company actually has after corporation tax. Paying out more than that is not a dividend, whatever the paperwork calls it.
Nothing is deducted at source. You declare dividends on your tax return and pay the tax after the year ends, so set the money aside as you go.