Dividend Allowance

How the Dividend Allowance Works

The dividend allowance for 2025/26 is £500. This means the first £500 of dividend income you receive each year is tax-free. Dividends above this are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).

The dividend allowance has been significantly reduced from £5,000 in 2017/18, making it much less generous for company directors and shareholders. For a limited company director paying themselves primarily through dividends, this means higher personal tax bills than a few years ago.

Dividends use up your basic and higher rate bands alongside other income, but they are taxed at lower rates than employment income. This is why many contractors operate through limited companies. See our dividend tax calculator for a full breakdown.

How Dividend Allowance Works in Practice

The Dividend Allowance is the amount of dividend income you can receive tax-free each year. For 2025/26, it is £500 (reduced from £2,000 in 2022/23 and £1,000 in 2023/24). Dividends above this allowance are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate). This reduction significantly impacts limited company owners who take income as dividends.

Practical Tips

The dramatic reduction of the Dividend Allowance from £2,000 to £500 has increased the tax burden on small company owners and shareholders. For limited company contractors, the optimal salary/dividend split now provides less tax advantage than before. If you receive dividends from investments held outside an ISA, the £500 allowance is quickly used. Always hold dividend-paying investments in an ISA where possible to avoid dividend tax entirely. See dividend tax calculator.

Related Topics

The Dividend Allowance uses up part of your basic rate band, which can push other income into the higher rate. Planning dividend income alongside employment income requires careful coordination.