Dividend tax explained
How dividend tax works — the allowance, rates and who has to pay it.
For anyone who owns shares or runs a company, dividends are a cheaper way to take money than salary — but the rules around them trip people up every year. The key idea is that dividends sit on top of your other income, and only the amount above your allowance gets taxed.
The dividend allowance
Each tax year, the first £500 of dividend income is tax-free. It’s an allowance, not a rate — it reduces the amount of dividends that count towards your tax bill, then everything above it is taxed at your dividend rate.
The rates
Dividends above the allowance are taxed at three rates, depending on your total income band:
- Basic rate — 8.75%
- Higher rate — 33.75%
- Additional rate — 39.35%
Example. You earn £40,000 from salary and receive £5,000 in dividends. The first £500 is covered by the allowance, leaving £4,500. Your salary already puts you in the basic-rate band, so the dividends are taxed at 8.75% — about £394. Compare that with the 20% income tax plus NI a salary would attract, and the saving is clear.
How the bands stack
Your dividend rate is decided by your total income — salary plus dividends. Salary filling the basic-rate band pushes dividends into the higher rate, which is why higher earners can be surprised by 33.75% bills. Always calculate dividends on top of your salary, not in isolation.
Company owners
If you run a limited company, dividends are the classic way to take money out: profits are taxed at corporation tax first, then dividends are extracted at these lower rates — and no National Insurance is payable on them. The dividend tax calculator shows the personal side; pair it with the corporation tax calculator for the full picture.
See the maths
Use the dividend tax calculator for your exact bill, and the salary calculator to compare taking income as salary instead.
Frequently asked questions
Do I pay tax on every dividend?
The first £500 of dividends each tax year is covered by the dividend allowance and is tax-free. Only dividends above that are taxed, at the rate your income band determines.
How do I know my dividend tax rate?
Add your dividend income to your other taxable income (salary, rental, savings). Where the total falls within the basic, higher or additional rate bands determines whether dividends are taxed at 8.75%, 33.75% or 39.35%.
Are dividends tax-efficient for company owners?
Often yes — dividend rates are lower than income tax on salary, and there's no National Insurance on dividends. But you only get dividends from profits already taxed at corporation tax, so the full picture needs both taxes considered.
Do I need to declare dividends?
If you're a company director or shareholder who receives dividends, you usually need to report them on a Self Assessment tax return when you're over the allowance or already within Self Assessment.
Try the calculators
Put the numbers from this guide into practice with our free tools.
This guide is for general information only and is not professional financial, tax or legal advice. UK rates and rules change, so always verify important figures with official GOV.UK / HMRC information or speak to a qualified professional. See our full disclaimer.
Keep reading
How UK Income Tax works
The tax-free allowance, rate bands and how PAYE takes tax from your pay.
Read the guide TaxUnderstanding tax bands
Basic, higher and additional rate explained with worked examples.
Read the guide TaxTax deadlines
Self-assessment key dates, penalties and what happens if you miss them.
Read the guide