UK dividend tax rates explained - allowances, bands, and what you'll pay in 2026/27

Tom Walker FCA, explains how dividends work and their treatment for the purposes of taxation.

Have you recently set up a Limited Company?

Or perhaps you've switched from being a sole trader? 

Chances are you've had people tell you to just, 'take the dividends, as it's more tax efficient!' 

The thing is you need to know how dividends actually work, when you can take them, and crucially how much tax you're then liable to pay. We often see confusion around this matter, particularly when UK dividend tax rates change. 

Given they're increasing from April 2026 in 2 earnings bands, timing is likely to matter now more than ever. That's why we've written this guide, to explain:

• What dividends are
• When they can legally be paid
• How the taxation of dividends works
• Current tax rates and the changes for 2026/27
• What to consider before taking out dividends

If you operate through a limited company, this post will give you a clear understanding of how dividends can fit into your overall tax planning strategy.

Quick links to sections covered in this blog post:

1. What is a dividend?

A dividend is a payment made by a limited company to its shareholders. This is from the profits made by the company.

If you own shares in your company, you're entitled to receive a proportion of the post tax profits in the form of dividends. There's an important rule to this mind:

A company can only pay dividends out of the profits that are available for distribution.

What this means is:

• Your company must have made a profit
• Corporation Tax has to have been accounted for
• Liabilities such as VAT and PAYE as well as other expenses need to have been covered
• There has to be sufficient retained earnings in the business

2. What counts as 'profit' for dividends purposes?

When we talk about profit, in the case of dividends we're referring to retained profits. These are accumulated earnings that are left in the business after tax and expenses have been deducted. 

As an example:

• Your company earns £100,000
• After expenses and Corporation Tax, you have £70,000 left
• That £70,000 becomes available for potential distribution as dividends (assuming no carried-forward losses)

An important point is that your profits can build over many years. You don't have to distribute them immediately. Sometimes directors may choose to retain the profits within the business for future investments, or as a means to smooth personal income across tax years.

3. Why dividends are beneficial to owner-managed businesses

Unlike taking just a salary:

• Dividends aren't subject to National Insurance
• They're taxed at lower rates than salary income
• They provide you with flexibility concerning timing of when you take them and therefore tax planning

4. A word of caution: unlawful dividends

Mistakes with regards to the distribution of dividends can become costly. If they're paid when there's insufficient profits in the business then they may be treated as:

• An unlawful dividend, or
• A director’s loan

The point is doing this can trigger unexpected tax consequences for both the company and you as an individual director. If the case is particularly serious then directors can become personally liable.

We’ve known of situations where business owners assumed 'there’s cash in the bank, so we can take it out.' Unfortunately, cash in the bank is not the same as distributable profit!

This is why you need proper documentation and up-to-date management accounts as they're essential before you declare dividends.

5. How do you issue a dividend?

Paying a dividend isn’t as simple as transferring money from your company bank account to your personal account.The reality is there's a legal process that must be adhered to.

For most owner-managed businesses, this involves three key steps:

a) Confirm there are sufficient distributable profits

Before declaring a dividend, directors should review:

• Up-to-date management accounts
• The company’s retained earnings
• Any current or expected liabilities

This ensures the dividend doesn't exceed available post-tax profits. This step is critical. If there's insufficient profit available, then the dividend may be classified as unlawful!

b) Declare the dividend

A board meeting has to be held, even if you’re the sole director. The decision to declare the dividend must be formally recorded in your board minutes and retained with your company records.

For small limited companies with one or two directors, this is usually straightforward — but it still needs to be documented properly.

c) Issue a dividend voucher

Each dividend payment must be supported by a dividend voucher.  The dividend voucher needs to include:

• Company name
• Company registration number
• Names of shareholders receiving the dividend
• The date of payment
• The gross amount of the dividend
• The share class
• A signature of the authorised officer

Each shareholder then has to receive a copy, while the company also retains one for its records.

6. How dividend amounts are calculated

Dividends are normally paid in proportion to share ownership.

As an example. if a company has £40,000 available for distribution and:

• Shareholder A owns 75%
• Shareholder B owns 25%

Shareholder A would usually receive £30,000 and Shareholder B £10,000.

However, companies can issue different classes of shares (for example, alphabet shares), which may put procedures in place to allow flexibility in how dividends are distributed. If this is in your planning then make sure it's structured correctly from the outset.

7. A common mistake - treating your dividends as 'spare cash'

One of the most frequent issues we see is directors withdrawing money from their company but without formally declaring any dividends.

The problem with this is if those payments are made without proper documentation, they may subsequently be treated as:

• A director’s loan, or
• An overdrawn director’s loan account  

This can then result in additional tax charges for your company and potentially you as a Director. So, good governance may feel like a lot of administration but it does help to protect you!

8. How much can you take in dividends? And what to be aware of

A common assumption we've seen many people make is to look at their business bank account, see there's money in there and think that they can therefore take it!

Unfortunately, it just doesn’t work like that.  A limited company can only distribute what is known as accumulated realised profits minus any accumulated realised losses.

To explain this, you can only pay dividends from genuine, after-tax profits that actually exist. So, be sure to remember that cash in the bank doesn't automatically equate to distributable profit!

9. Exploring realised vs unrealised profits, and why it matters

Say your year-end accounts show £30,000 of retained profit. Then shortly after year-end, your company incurs a £25,000 loss!

Your accounts show a profit, but it incumbent on the directors to consider the current financial position of the company before declaring any dividends. This means if subsequent losses eliminate available profits, paying a dividend could become unlawful.

Remember it's directors that are personally responsible for ensuring dividends are lawful at the time they are declared.

10. What happens if a dividend is unlawful?

If an unlawful dividend is paid:

• The shareholder may be required to repay it
• It may be treated as a director’s loan
• Additional tax charges could arise
• Directors could become personally liable

Under the Companies Act, shareholders can be required to repay a dividend if they knew — or should reasonably have known — it was unlawful at the time.

For small owner-managed businesses where the director and shareholder are often the same person, this can create uncomfortable tax and legal consequences.

11. Don’t forget your Articles of Association

Your company’s Articles of Association (the legally binding, written rulebook that defines its internal governance, administrative structure, and the rights of its directors and shareholders) may contain restrictions on:

• When dividends can be paid
• How they must be declared
• The rights attached to different share classes

If you have multiple share classes (for example, alphabet shares), dividend entitlement may well differ between shareholders. This means before declaring dividends, it’s important you understand how your company’s share structure operates.

A practical example

Your company has £50,000 retained profit at your year-end in April and you declare £40,000 of dividends in May. Then in June, an unexpected expense reduces your profits by £15,000.

This highlights the need for management accounts and reviewing your finances regularly. The reason being you need to do so before declaring the dividend, otherwise you could face compliance and tax complications.

It's another reason why up-to-date financial information matters!

12. When can dividends be paid? 

There are two main types:

a) Final dividends

These are declared after year-end accounts have been prepared and profits are confirmed.

b) Interim dividends

These are declared during the financial year, based on up-to-date management accounts.

For most owner-managed businesses, dividends are taken throughout the year as interim dividends, monthly or quarterly, albeit depending on cash flow and tax planning.

There is no legal limit on how many dividends can be issued in a year. However, each dividend must:

• Be supported by sufficient profits
• Be properly declared
• Be documented with board minutes
• Be accompanied by a dividend voucher

Remember, the more frequently dividends are issued, the more administrative work is required.

You may be able to pay dividends any time but that doesn’t mean you should

While dividends can technically be taken whenever profits allow, timing can have significant personal tax consequences.  Dividends are taxed based on:

• The date they are declared and paid
• The tax year they fall into

Importantly, they're not taxed:

• When the work was done
• When profit was earned
• When the invoice was raised

This distinction is significant. A dividend paid on 5 April 2026 falls into the 2025/26 tax year.  A dividend paid one day later, on 6 April 2026 then falls into 2026/27. If tax rates increase (as they are scheduled to in two bands from April 2026), that one-day difference could materially increase your tax bill.

So, timing is not just administrative it's also financially strategic.

13. Cash flow vs tax efficiency

When planning dividends, directors need to balance:

• Company cash flow
• Personal income requirements
• Corporation Tax liabilities
• Upcoming tax changes
• Marginal income tax bands

In some cases, accelerating dividends before a tax rise may make sense. In others, spreading income across years could be more efficient.

There is no one-size-fits-all approach which is why forward planning matters.

14. The dividend tax rates for 2025/26 and 2026/27

If you take dividends from your limited company, you’ll pay dividend tax personally — not through the company.

The tax rates are as follows, from 6 April 2026 the rates are increasing in 2 of the tax bands (highlighted in yellow):

The increase in the basic and higher-rate bands means timing when you take dividends may now have a meaningful impact on your personal tax bill!

15. How the dividend allowance works

You benefit from the tax-free dividend allowance and this means:

• You don't pay any tax on the first £500 of dividend income that you receive
• BUT it still counts to your overall income to determine which tax band you fall into

The allowance does not sit “outside” your tax bands. It simply applies a 0% rate to the first £500.

Above the allowance and the amount of tax you owe is determined by the tax bracket you fall into. This is commonly known as your marginal tax rate.

16. How dividend tax interacts with salary

Most owner-managers take a combination of:

• A salary (often to around the personal allowance level) and;
• Dividends

For 2025/26, the Income Tax personal allowance remains £12,570.

If you take:

• £12,570 salary and;
• £40,000 dividends

Your total income is £52,570.

That means: 

• Part of your dividends will fall into the basic-rate band
• Any excess above £50,270 will move into the higher-rate band

This is where careful planning matters.

Example: 2025/26 dividend tax calculation

Let’s run with the above example.

• Salary: £12,570
• Dividends: £40,000

Step 1: The dividend allowance

This is £500 taxed at 0% but importantly when a salary is in the mix it actually sits within the basic-rate band.  

Step 2: Remaining dividends = £40,000

Basic-rate band threshold: £50,270 but you minus the £500 allowance from the income falling in this band. 

Since salary already uses £12,570, the remaining basic-rate band is:

£49,770 – £12,570 = £37,200

So:

£37,200 taxed at 8.75%

£2,300 taxed at 33.75%

This creates a tax liability that's a combination of both salary and dividend income.

Without planning, and depending on your circumstances, it’s easy to accidentally push dividends into the higher-rate band.

17. Why April 2026 matters

Let's use the same £40,000 dividend example, it's paid on 5 April 2026 when the 2025/26 rates apply. But on 6 April 2026, the 2026/27 rates are in force. 

If you remain within the basic-rate band, the tax rate increases 2% from 8.75% to 10.75%. 

At £40,000, that could mean hundreds, or even potentially thousands, more in tax depending on your income levels and circumstances. A one-day difference could change the tax outcome!

Key takeaway

Dividends remain tax-efficient compared to salary in many cases, but:

• The dividend allowance has been reduced in recent years to just £500
• Two tax bands increase from April 2026
• Timing can impact the amount of tax you owe
• Your total income position matters more than ever

Keep in mind also that when your combined income exceeds £100,000 then for every £2 above this level then your £12,570 tax-free personal allowance is reduced by £1. This is called tapering and it continues until your income hits £124,140 when the allowance reaches zero.

Also if you have made use of child benefit to help raise your children then you need to be aware of the High Income Child Benefit Charge (HIBC). This is a tax charge that claws back child benefit from families where one partner has income above £60,000. Again this is tapered, meaning for every £200 earned over £60,000, 1% of the total benefit is repayable, with 100% of the benefit lost when income reaches £80,000.

This all goes to show that forward planning is absolutely essential!

18. Timing dividends – tax efficient strategies to consider

With dividend tax rates increasing from 6 April 2026 in the basic and higher-rate bands, timing has become potentially more important. As a reminder dividend tax is triggered based on:

• The date the dividend is declared and paid
• The tax year it falls into

This is why dividends paid on 5 April fall sunder under 2025/26 tax rules whereas those paid on 6 April 2026 fall into the new tax year and therefore likely higher rates.   

a) Should you accelerate dividends before April 2026?

In many cases, accelerating dividends into 2025/26 may reduce your overall tax bill.

This may make sense if:

• You expect to move into a higher tax band in 2026/27
• You have unused basic or higher-rate band headroom
• The company has sufficient post-tax profits and cash available

However, acceleration may not always be the correct answer if taking additional dividends results in:

• Pushing you into a higher tax band now
• Causing you to lose your personal allowance
• Creates a cash flow strain in the company

You may simply be paying more tax earlier as opposed to less tax overall. Good, carefully considered planning will look to review your full income position.

b) The potential mistake of 'taking it all now'

Whenever tax rates are due to rise, we often see business owners rush to extract large dividends before the deadline. But this isn't guaranteed to always work out well. Here are some questions to ask yourself before before accelerating dividends:

Will this move push me into the higher or additional rate band this year?

Could it reduce or eliminate my personal allowance?

Does the company need this cash for growth or working capital?

Am I creating a larger personal tax bill than necessary?

Good planning is about smoothing income across tax years and not spiking it unnecessarily.

c) Using lower tax bands intentionally

A potentially more structured strategy could be to:

• Forecast your expected total income for 2025/26
• Identify how much headroom remains in your basic or higher-rate bands
• Distribute dividends strategically to use those bands efficiently
• Avoid drifting into higher rates without realising it

This approach typically involves:

• Smaller, planned dividends
• Alignment with salary levels
• Forward income forecasting
• Ongoing review of your financial circumstances prior to 6 April 2026

Done properly, this can create measurable tax savings without creating unnecessary risk.

d) After April 2026 – what changes?

From April 2026, dividend planning doesn’t stop — it simply requires more thought.

You may need to reconsider:

• The balance between salary and dividends
• Whether retaining profits within the company is preferable
• Long-term extraction strategies
• Pension contributions as an alternative route

The coming months represent a useful planning window BUT not a rush to act impulsively. So, the question isn’t about how much you can take before the rules change? Instead it's about what you would have taken anyway and when is the most tax-efficient time to take it?

That's a significant distinction that can make a big difference!

19. How and when is dividend tax paid?

If you complete a Self Assessment tax return:

• Dividend income is declared in the dividend section of the return
• Tax is usually due by 31 January following the end of the tax year

As an example, dividends received in the 2025/26 tax year (ending 5 April 2026):

• Must be declared by 31 January 2027
• Tax is payable by 31 January 2027

20. What is payment on account?

If your tax bill exceeds £1,000 and less than 80% of your tax has been collected at source, HMRC may require you to make payments on account.

This means:

You pay 50% of your estimated next year’s tax in advance on 31 January

The remaining 50% is paid on 31 July

This can cause surprises for many directors.

If your dividend tax bill is £8,000, you may need to pay:

• £8,000 for the current year plus
• £4,000 as the first payment on account

The total then payable in January is £12,000 and without planning, this can create cashflow pressure. So as a practical tip we suggest you set money aside as you go. 

21. Avoid stress on your tax payments

One of the simplest ways to avoid stress is to:

• Estimate your dividend tax liability before taking dividends
• Transfer a percentage into a separate savings account
• Review your tax position before 5 April each year

Small, regular planning decisions prevent large surprises later.

22. Dividends are powerful but require planning

Dividends remain one of the most tax-efficient ways for owner-managers to extract profits from a limited company. However:

• The dividend allowance is now minimal
• Tax rates increase in two bands from April 2026
• Timing can materially affect your tax bill
• Poor documentation can create legal and tax risk.

If you’re unsure whether to accelerate dividends before April 2026, or want clarity on the most tax-efficient extraction strategy for your circumstances, getting proactive advice can make a measurable difference.

We work closely with business owners to structure remuneration in a way that balances tax efficiency and compliance, with long-term growth. The earlier you plan, the more options you'll likely have.

This post was created on 29/10/2021 and updated on 19/02/2026.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.