Dividend Tax Rates 2025/26
| Band | Rate | Tax on £5,000 | You Keep |
|---|---|---|---|
| Tax-free allowance | 0% | First £500 tax-free | |
| Basic rate | 8.75% | £394 | £4,606 |
| Higher rate | 33.75% | £1,519 | £3,481 |
| Additional rate | 39.35% | £1,771 | £3,229 |
The rate depends on your total income (salary + dividends). Dividends use up your remaining basic rate band after salary. This is why Ltd company directors pay themselves a low salary (£12,570) and take the rest as dividends — it's more tax-efficient. See our salary vs dividends guide.
Dividend Tax on £5,000
Dividends in the UK are taxed differently to employment income. The first £500 of dividend income is tax-free (the Dividend Allowance). Above this, the tax rates are: 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). National Insurance is not payable on dividends.
How Dividend Tax Interacts with Your Salary
Dividend income sits on top of your employment income for tax purposes. If your salary already uses up your basic-rate band (up to £50,270), your dividends will be taxed at the higher rate of 33.75%. On £5,000 in dividends, the tax can be significant. As a higher-rate taxpayer, the tax bill on dividends above the allowance could be approximately £1,518. See income tax calculators for combined income planning.
Tax-Efficient Dividend Planning
If you receive dividends through a limited company, the optimal strategy typically involves paying a salary up to the Personal Allowance (£12,570) and taking the remainder as dividends. This minimises the combined corporation tax and dividend tax burden. However, IR35 rules may restrict this for contractors. Holding dividend-paying investments in an ISA eliminates dividend tax entirely on up to £20,000 invested per year.