Limited company
Dividends are a tax efficient way to take money from a company and a key part of investing. Here is how HMRC taxes them in 2026/27, with a worked example.
Dividends are one of the most tax efficient ways to take money out of a limited company, and they matter just as much to anyone with shares or an investment portfolio. The rules changed for the worse in recent years, with a much smaller tax free allowance, so it pays to understand exactly how dividends are taxed. This guide explains the rules in plain English for the 2026/27 tax year, with a worked example for a typical company director.
A dividend is a payment a company makes to its shareholders out of its profits after corporation tax. For an owner managed company, the director is usually also the shareholder, so dividends are a way of taking the company profit personally. A dividend is not the same as a salary. It is not a business expense, it does not reduce the company corporation tax bill, and it cannot be paid out of money the company does not actually have in retained profit. Paying a dividend when there are no profits to support it is unlawful, which is one reason getting the paperwork right matters.
Everyone has a dividend allowance, which for the 2026/27 tax year is 500 pounds. The first 500 pounds of dividends you receive in the year are taxed at 0 per cent, whatever your income. This allowance has been cut sharply over the years, from 5,000 pounds when it was introduced down to 500 pounds now, so far more people pay dividend tax than used to. The allowance still uses up part of your tax band even though the tax on it is nil, which matters when you work out the rate on the rest.
Above the allowance, dividends have their own set of rates, which are lower than the rates on salary. For 2026/27 they are 8.75 per cent if the dividend falls in the basic rate band, 33.75 per cent in the higher rate band, and 39.35 per cent in the additional rate band. Dividends are treated as the top slice of your income, which means they are taxed after your other income such as salary, pension and savings interest. So the rate you pay on your dividends depends on how much other income you already have.
Take a typical company director who pays themselves a salary of 12,570 pounds and takes 30,000 pounds in dividends. The salary is fully covered by the personal allowance, so there is no Income Tax or, at that level, only minimal National Insurance on it. Of the dividends, the first 500 pounds are covered by the dividend allowance and taxed at 0 per cent. That leaves 29,500 pounds of dividends. Because the salary only used the personal allowance, the whole of the basic rate band is still available, so all 29,500 pounds falls in the basic rate band and is taxed at 8.75 per cent. The dividend tax is 29,500 pounds at 8.75 per cent, which is 2,581 pounds. The director has taken 42,570 pounds in total for a tax cost of around 2,581 pounds, which shows why the salary and dividend mix is so popular.
If the same director took larger dividends, the picture changes. Once total income passes the higher rate threshold of 50,270 pounds, dividends above that point are taxed at 33.75 per cent rather than 8.75 per cent, and above 125,140 pounds the rate becomes 39.35 per cent. This is why directors often plan their dividends carefully around the higher rate threshold, sometimes leaving profit in the company to take in a later year, or splitting income with a spouse who also owns shares, so that more of the dividends stay in the lower band.
For most owner managed companies the tax efficient approach is a modest salary topped up with dividends. A salary up to a sensible level is a deductible expense for the company and can preserve your entitlement to the state pension through your National Insurance record, while dividends carry no National Insurance at all and a lower tax rate. The exact best mix depends on your profits, your other income and the company position, which is the sort of planning we do for clients every year.
You report your dividends on your self assessment tax return for the tax year in which they were paid, and any tax is due by 31 January after the end of that tax year. If your only untaxed income is dividends of less than 10,000 pounds, HMRC can sometimes collect the tax by adjusting your tax code instead, but once dividends pass 10,000 pounds you must file a return. Each time the company pays a dividend it should prepare a dividend voucher showing the date, the company, the shareholder and the amount, and the decision should be minuted, because this is the evidence that the dividend was lawful and correctly taken.
The biggest mistakes we see are taking dividends when the company has no retained profit, which makes them unlawful and can turn them into a loan that triggers extra tax, and forgetting that dividends still have to be reported even though the tax rate is low. Another is leaving everything to the last minute, when careful timing across two tax years could have saved real money. None of these are hard to avoid with a little planning.
We work out the most tax efficient salary and dividend mix for your company each year, make sure every dividend is lawful and properly documented, and handle the self assessment so it is right and on time. If you also hold shares or funds outside a company, we make sure those dividends are reported correctly too. Book a free call back and we will look at your own numbers.
Dividend tax is not only for company directors. If you hold shares, investment trusts or funds that pay dividends, the same allowance and rates apply to that income. Equity funds pay dividend distributions, and even accumulation funds, where the income is reinvested rather than paid out, produce taxable dividend income each year that you must include. Your fund platform will usually give you a consolidated tax voucher each year showing the dividends to report, which makes the job much easier.
There is one simple way to take dividends with no tax at all, which is to hold the shares or funds inside a stocks and shares ISA. Dividends received inside an ISA are completely free of tax, do not use your dividend allowance, and do not need to be reported. For investors, gradually moving income producing holdings into an ISA is one of the easiest ways to protect dividend income from tax for good.
Couples can often reduce the tax on dividends by sharing ownership. If shares are held jointly, or some are transferred to the spouse with the lower income, more of the dividends can fall within a lower tax band and use two dividend allowances instead of one. In a family company, giving a spouse who genuinely works in or owns part of the business their own shares can be a legitimate and effective way to split dividend income, although it must be done properly, so it is worth taking advice before you act.
To see what happens when dividends are larger, take a director with a 12,570 pound salary and 50,000 pounds of dividends. The salary uses the personal allowance. The first 500 pounds of dividends are covered by the dividend allowance at 0 per cent. The basic rate band has 37,700 pounds of room, and after the 500 pound allowance has used part of it, around 37,200 pounds of dividends are taxed at 8.75 per cent, which is about 3,255 pounds. The remaining dividends, roughly 12,300 pounds, fall into the higher rate band and are taxed at 33.75 per cent, which is about 4,151 pounds. The total dividend tax is around 7,406 pounds. This shows how sharply the cost rises once you cross the higher rate threshold, and why directors often hold dividends back to a later year.
A common trap is taking money out of the company through the year as if it were dividends, then finding at the year end that there were not enough profits to cover them. The excess is treated as a loan to the director. If that loan is still outstanding nine months after the year end, the company pays a temporary tax charge of 33.75 per cent on it until it is repaid, and there can be a benefit in kind charge on the director too. Keeping dividends within the available profits and documenting them properly avoids this entirely.
Because dividends are taxed in the year they are paid, the timing can matter a great deal. Splitting a large dividend across two tax years, for example taking some before 5 April and the rest after, can keep more of it in the basic rate band and use two years of allowances. This kind of planning is simple but valuable, and it is one of the first things we look at for company clients each year.
The first 500 pounds of dividends in the 2026/27 tax year are covered by the dividend allowance and taxed at 0 per cent. Above that, dividends are taxed at 8.75, 33.75 or 39.35 per cent depending on which band they fall in once added to your other income.
Usually a mix is best. A modest salary is deductible for the company and protects your state pension record, while dividends carry no National Insurance and a lower tax rate. The ideal split depends on your profits and other income.
If your dividends are above 10,000 pounds you must file a self assessment return. Below that, HMRC can sometimes collect the tax through your tax code, but it is often simpler and safer to report them on a return.
No. Dividends can only be paid out of retained profit after corporation tax. Paying one when there is no profit to support it is unlawful and can be reclassified as a loan, which brings extra tax charges.
We work out the best salary and dividend mix for your company and handle the paperwork and the tax return. Book a free call back and we will look at your numbers.