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Where the dividend allowance stands
The dividend allowance is £500. It has been at that level since 6 April 2024, down from £2,000 in 2022/23 and £1,000 in 2023/24. In three years it has fallen by 75%.
The allowance is not an exemption in the way people assume. It does not take £500 off your bill. It taxes the first £500 of dividends at 0%, but those dividends still count towards your total income when working out which band the rest of your dividends fall into. That distinction matters if you are sitting near a threshold.
The rates went up in April 2026
This is the change that has not registered with a lot of directors. From 6 April 2026 the dividend tax rates rose by 2 percentage points at the basic and higher rates. The ordinary rate is now 10.75%, up from 10.75%. The upper rate is 35.75%, up from 35.75%. The additional rate stays at 39.35%.
So the squeeze comes from both ends at once. The tax free slice shrank to £500, and the rate applied to everything above it went up. A director taking £40,000 of dividends on top of a small salary is paying materially more than two years ago for exactly the same extraction.
What this does to salary versus dividends
The old rule of thumb was simple: small salary, rest as dividends. That still works for most owner managed companies, but the margin is thinner than it was and it is no longer automatic.
The arithmetic has moved because dividends are paid out of profit that has already borne corporation tax, and now face a higher personal rate on top. Salary is deductible for corporation tax but carries National Insurance. As the dividend rates climb, the gap between the two routes narrows. For some directors, particularly those already into the higher rate band, the answer in 2026/27 is not the answer from 2023/24.
There is no universal answer, which is precisely why the internet is full of confident ones. It depends on your profit level, your other income, whether your company can claim the Employment Allowance, and what you want the company to do with retained profit.
What to actually do about it
Use your ISA allowance for investment dividends. Dividends inside an ISA sit outside all of this, and with the allowance at £500 that shelter is worth far more than it used to be.
If you hold shares jointly with a spouse or civil partner, check you are both using your £500. Two allowances beat one, and transfers between spouses are generally free of capital gains tax.
If you are a director, model both routes before the year end rather than after it. Once the year has closed, your options narrow considerably.
Common questions
Do I need to file a tax return for a small dividend?
If dividends are your only untaxed income and they are under £500, generally not. Above that you will usually need to report them. If you already file a return, include them regardless.
Does the £500 apply per company or in total?
In total, across all your dividend income for the year. It is a personal allowance, not a per holding one.
Figures are for 2026/27 and checked against current HMRC guidance. This is general information rather than advice on your own position. If you are a director working out how to pay yourself this year, get in touch.
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How directors pay themselves Salary vs dividends Limited company accounts