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Summary
UK dividend income above the £500 annual dividend allowance is taxed at special rates that are lower than income tax rates on salary: 8.75% for basic-rate taxpayers, 33.75% for higher-rate, and 39.35% for additional-rate. Dividends are added to your other income to determine which band they fall into, and the first £500 is always tax-free regardless of your tax band.
How it works
Dividend allowance
The first £500 of dividend income each tax year is tax-free (the dividend allowance). This applies regardless of your other income. Dividends within your personal allowance (£12,570) are also tax-free.
Dividend tax rates (2025-26)
| Band | Dividend rate |
|---|---|
| Basic rate (up to £50,270 total income) | 8.75% |
| Higher rate (£50,271 - £125,140) | 33.75% |
| Additional rate (over £125,140) | 39.35% |
From April 2026, rates increase by 2 percentage points to 10.75%, 35.75%, and 41.35% respectively.
How dividends interact with other income
Dividends sit on top of your other income for tax band purposes. Your employment income (salary) occupies the personal allowance and basic rate band first, then dividends fill the remaining bands:
- Personal allowance: first £12,570 of all income (tax-free)
- Basic rate band: next £37,700
- Higher rate band: up to £125,140
- Additional rate: above £125,140
If your salary uses up the basic rate band, all dividend income is taxed at the higher dividend rate.
No National Insurance
Dividends are not subject to National Insurance contributions — neither employee nor employer. This is one reason company directors pay themselves partly in dividends.
Worked example
Salary: £40,000, Dividend income: £15,000
- Personal allowance used by salary: £12,570
- Salary taxable at basic rate: £40,000 - £12,570 = £27,430
- Basic rate band remaining: £37,700 - £27,430 = £10,270
- Dividend allowance: £500 (tax-free)
- Dividends in basic rate band: min(£14,500, £10,270) = £10,270 at 8.75% = £899
- Dividends in higher rate band: £14,500 - £10,270 = £4,230 at 33.75% = £1,428
- Total dividend tax: £899 + £1,428 = £2,327
Inputs explained
- Annual salary — employment income (determines how much of the basic rate band is used)
- Dividend income — total dividends received in the tax year
- Other income — rental income, interest, etc. that also occupies tax bands
- Tax year — determines rates and allowances
Outputs explained
- Dividend tax due — the income tax on dividends above the allowance
- Effective dividend rate — total dividend tax as a percentage of total dividends
- Combined tax position — total income tax across salary and dividends
- Band breakdown — how much of your dividend income falls in each tax band
Assumptions & limitations
- Dividends from shares held in an ISA are completely tax-free and do not count toward the dividend allowance.
- The calculator assumes dividends are UK dividends. Foreign dividends may have different treatment and potential double taxation relief.
- Company directors taking a small salary plus dividends to minimize tax should be aware of the disguised remuneration rules and IR35 implications.
- From April 2026, dividend tax rates increase by 2 percentage points, significantly increasing the tax burden on dividend income.