How Much Dividend Can You Pay Yourself Tax-Free
- Adil Akhtar
- Aug 29
- 14 min read
How Much Dividend Can You Pay Yourself Tax-Free in the UK? (2025/26 Update)
For the 2025/26 tax year, you can only earn £500 of dividend income completely tax-free, thanks to the dividend allowance. This is a far cry from the £5,000 allowance that existed back in 2016/17. The allowance was cut to £2,000, then £1,000 in 2023/24, and is now frozen at just £500.
But here’s the crucial bit many people miss: dividends aren’t taxed in isolation. You also have your Personal Allowance—still stuck at £12,570 for 2025/26 (frozen since 2021/22). So, depending on your other income, you could receive significantly more than £500 of dividends before paying a penny in tax.
Personal Allowance – Your First Tax Shield
Every UK taxpayer gets a Personal Allowance of £12,570, unless their income exceeds £100,000 (where it tapers away). This allowance can cover salary, self-employed profits, rental income, or dividends.
So, if your only income is dividends, the first £12,570 of dividends are tax-free. Add your £500 dividend allowance, and that gives you £13,070 tax-free dividends in total for 2025/26.
But most people don’t live off dividends alone—so things get trickier when salary, pensions, rental profits or side hustles are added to the mix.
Dividend Allowance – A Separate Relief
Think of the £500 dividend allowance like a little protective shield on top of your Personal Allowance. It applies regardless of your other income, and the dividends it covers are tax-free.
Here’s the catch: this allowance doesn’t reduce your taxable income figure. Instead, it effectively means you pay 0% tax on that slice of dividends—but they still count towards your total income for working out which band the rest falls into.
I’ve seen clients get this wrong—assuming £500 “vanishes” from their income for band purposes. It doesn’t. And that misunderstanding can push you into an unexpected higher rate band.
2025/26 Dividend Tax Rates
Once you’ve used your allowances, the following dividend tax rates apply (England, Wales, NI):
● Basic rate: 8.75% (on dividends within income up to £50,270)
● Higher rate: 33.75% (on dividends within £50,271 – £125,140)
● Additional rate: 39.35% (above £125,140)
These are lower than income tax rates (20% / 40% / 45%), which is why limited company owners often prefer dividends to salaries.
For Scottish taxpayers, remember income tax bands differ for earnings, but dividend tax bands remain aligned with UK-wide thresholds—so this part doesn’t change.
Example: Dividend-Only Income
Picture this: Sarah, a small business owner in Leeds, decides not to take a salary in 2025/26, just dividends. She withdraws £20,000 in dividends.
Here’s how it breaks down:
● £12,570 covered by Personal Allowance = £0 tax
● £500 covered by Dividend Allowance = £0 tax
● Remaining £6,930 taxed at 8.75% = £606.38 tax bill
So, Sarah’s total tax-free dividends = £13,070. She pays just over £600 in tax on the rest.
Example: Salary Plus Dividends
Now, let’s take James, a contractor in Manchester. He pays himself a small salary of £12,570 (using up his full Personal Allowance), and then draws £15,000 in dividends.
Breakdown:
● £12,570 salary = covered by Personal Allowance = £0 income tax
● Dividend allowance = £500 = £0 tax
● Remaining £14,500 falls into the basic rate band = taxed at 8.75% = £1,268.75 tax
So, even though James used up his Personal Allowance on salary, he still benefits from the £500 dividend allowance.
Why Most People Pay More Tax Now
None of us love tax surprises, but here’s the reality: the shrinking dividend allowance, frozen thresholds, and wage inflation mean millions are getting dragged into paying dividend tax.
According to recent analysis, more than 3.7 million people will face dividend tax in 2025/26, up from around 2.5 million just a couple of years ago. That’s a record high—and I can tell you from my advisory work, many clients don’t realise until their accountant files their Self Assessment.
Common Pitfall: Mixing Multiple Income Sources
Be careful here, because I’ve seen clients trip up when combining incomes. For example:
● Someone with a £40,000 salary and £5,000 dividends might assume all dividends fall into the basic rate band. But once the salary is added, most of the dividends still get the 8.75% rate, but if your total income tips over £50,270, some dividends get taxed at 33.75%.
This is where checking your tax band crossover point matters. A quick calculation in your HMRC personal tax account (https://www.gov.uk/personal-tax-account) will show you where you stand.
Quick Reference Table: 2025/26 Dividend Tax-Free Amounts
Here’s a simple table that sums up the tax-free amounts based on different situations:
Income Type | Personal Allowance Used? | Dividend Allowance | Max Tax-Free Dividends 2025/26 |
Dividends only | Yes, fully (£12,570) | £500 | £13,070 |
Salary uses PA | Yes, none left for dividends | £500 | £500 |
Mixed income (salary below PA) | Partially | £500 + remaining PA | Up to £13,070 (depends on salary) |
Why This Matters for Business Owners
Now, let’s think about your situation—if you’re running a limited company, you have more control. You can set your salary at the Personal Allowance level (or slightly below to optimise National Insurance), then top up with dividends.
This strategy keeps income tax low while making the most of allowances. But remember: HMRC keeps a sharp eye on reasonable salary vs. dividends. Pay too little salary and you may miss NI credits; pay too much and you waste allowances. The balance is key.
Step-by-Step Guide to Checking Your Tax-Free Dividend Position
Step 1 – Confirm Your Personal Allowance
Head to your Personal Tax Account. This shows how much of your £12,570 Personal Allowance you’ve already used against salary, pensions, or self-employed profits.
● If fully used: only the £500 dividend allowance remains.
● If partially used: the leftover allowance can shield some dividends.
● If unused: up to £12,570 of dividends can be tax-free, plus the £500 dividend allowance.
Step 2 – Add Your Dividend Allowance
The Dividend Allowance for 2025/26 is £500. Add this on top of any Personal Allowance you have left.
Think of it as an “extra slice” of income you don’t pay tax on, but which still counts for band placement.
Step 3 – Work Out Your Tax Band Crossover
Check where your total income sits within the tax bands. For 2025/26:
● Basic rate limit: £50,270
● Higher rate limit: £125,140
● Above that: Additional rate
See official guidance: Income Tax rates and bands.
This step is crucial, because even if most of your income is taxed at basic rate, just £1 over the limit pushes the excess into higher rate.
Step 4 – Apply Dividend Tax Rates
Once allowances are exhausted, apply the dividend tax rates:
● 8.75% basic rate
● 33.75% higher rate
● 39.35% additional rate
Official guidance: Tax on dividends.
Case Study 1 – Employee with Side Dividends
Picture this: Hannah earns £38,000 salary from her job in Bristol. She also owns some company shares, giving her £2,000 dividends in 2025/26.
● Salary (£38,000) uses most of her £12,570 Personal Allowance.
● She has no allowance left for dividends, but the £500 dividend allowance still applies.
● £500 of dividends = tax-free.
● Remaining £1,500 falls within the basic rate band = taxed at 8.75% = £131.25 tax.
She doesn’t need to panic about Self Assessment because HMRC can usually collect this small amount via PAYE code adjustment (see Paying tax on dividends).
Case Study 2 – Self-Employed with Dividends on the Side
Now let’s think about Ravi, a self-employed graphic designer in Birmingham. He makes £10,000 profits and also draws £6,000 dividends from his limited company.
● His £12,570 Personal Allowance covers all £10,000 profits + £2,570 of dividends.
● Add £500 dividend allowance = £3,070 dividends tax-free.
● Remaining £2,930 dividends taxed at 8.75% = £256.38 tax.
Because Ravi’s income comes from both self-employment and dividends, he must file a Self Assessment tax return (Self Assessment overview). Missing this would mean penalties.
Case Study 3 – Business Owner Salary + Dividends Mix
Finally, take Emily, who runs a small consultancy in London. She sets her salary at £9,100 (just below the National Insurance primary threshold for 2025/26 – see National Insurance thresholds). She then pays herself £40,000 in dividends.
Calculation:
● Salary £9,100 uses part of her Personal Allowance, leaving £3,470.
● £3,470 of dividends = tax-free.
● Add £500 dividend allowance = £3,970 total tax-free dividends.
● Remaining £36,030 dividends taxed:
○ £32,830 at 8.75% (basic rate) = £2,871.63
○ £3,200 at 33.75% (higher rate) = £1,080
● Total dividend tax = £3,951.63.
Emily benefits from NI savings on the low salary while maximising dividend efficiency. But she must keep in mind pension contributions—NI credits build her state pension record.
Forgetting Small Dividends
Many taxpayers overlook small dividend payments from investment accounts. HMRC gets reports from companies, so undeclared dividends can trigger compliance letters. Always cross-check bank statements and broker summaries.
Assuming Allowances “Double Up”
Some believe they can claim the dividend allowance twice (once personally, once via their company). Not true: the allowance is personal, not per company.
Misjudging Band Thresholds
A frequent trap: assuming all dividends are taxed at 8.75%. But once your total income crosses £50,270, the excess dividends jump to 33.75%.
Check your total income using HMRC’s Estimate your Income Tax tool to avoid nasty surprises.
Quick Checklist to Verify Your Tax-Free Dividend Position
Log in to your Personal Tax Account.
Confirm how much Personal Allowance is already used.
Add your £500 Dividend Allowance.
Work out which tax band your total income falls into.
Apply dividend tax rates: 8.75%, 33.75%, 39.35%.
Double-check all dividend sources (brokers, company, joint shares).
Decide if you need to file a Self Assessment.
Keep records (dividend vouchers, bank statements).
Handling Multiple Income Sources with Dividends
Now, let’s imagine you’re juggling income from several places — say, a PAYE salary, rental profits, and dividends. This is where I’ve seen clients trip up, because it’s not always obvious how HMRC stacks things together.
HMRC’s system looks at total taxable income, not each stream separately. Salary and rental income eat into your allowances and bands first, leaving less room for dividends at lower rates.
Check your position with the Estimate your Income Tax tool. It lets you plug in salary, pensions, rental income, and dividends together so you can see how bands interact.
Scottish and Welsh Variations
Here’s an important distinction:
● Scotland has its own Income Tax rates and bands for earned income. These differ significantly from the rest of the UK (starter, basic, intermediate, higher, and top rates).
● But crucially, dividend tax bands remain UK-wide. This means your dividends are always taxed against the standard UK thresholds (£50,270 basic, £125,140 higher).
For Wales, devolved powers exist, but the Welsh Government has so far chosen to align income tax rates with England and Northern Ireland (Welsh rates of income tax). Again, dividends remain the same.
So while earned income bands differ in Scotland (and could in Wales if they diverge in future), dividends are consistent across the UK.
Emergency Tax and Dividends
Now, here’s a tricky one I’ve seen more than once. Emergency tax codes (e.g., when someone changes jobs mid-year) can throw off your PAYE. Dividends themselves aren’t subject to PAYE, but because your total income position is wrong in HMRC’s system, the wrong band might be assumed for dividend calculations later.
This often comes out when you file a Self Assessment or when HMRC does a year-end reconciliation. To catch it early, always check your tax code notice and make sure your employer has updated income details. If you spot an emergency code (like 1257L W1/M1), get it corrected as soon as possible.
The High-Income Child Benefit Charge (HICBC)
This is a classic “gotcha” I’ve seen clients stumble over. If your total income (salary + dividends + other sources) exceeds £50,000, and you or your partner claim Child Benefit, you may face the High Income Child Benefit Charge.
The charge claws back 1% of Child Benefit for every £100 of income above £50,000, disappearing completely at £60,000.
So even if you thought your dividends were being taxed “efficiently”, they might tip you into this extra liability. That’s why planning dividend levels carefully matters for families.
Dividend Income and Pension Contributions
There’s a subtle but important point here. Dividends don’t count as “relevant UK earnings” for pension contribution relief. This means you can’t make large tax-relieved pension contributions purely on dividend income.
However, you can still contribute up to £3,600 gross per year if you have no other earnings. Check Tax on your private pension contributions for details.
I’ve had business-owner clients caught out by this — paying themselves only dividends, only to discover they can’t make big tax-efficient pension payments. The fix? A small salary that qualifies as relevant earnings.
Dividends and Capital Gains: Overlooked Interaction
Another overlooked scenario is when someone sells shares in addition to receiving dividends. Capital gains and dividend income are separate, but they both sit on top of your overall income.
Your Capital Gains Tax allowance for 2025/26 remains just £3,000. Gains are taxed at 10%/20% (or 18%/24% for residential property), but your income level decides which CGT rate applies.
So if your dividends push you into higher rate, your capital gains could face 20% instead of 10%. This interaction is easy to miss unless you calculate all income together.
When You Must File a Tax Return
Not everyone with dividends needs a Self Assessment return, but you must file if:
● You receive more than £10,000 dividends.
● Or, if dividends not taxed via PAYE exceed £2,500.
Official guidance: Check if you need to send a tax return.
In practice, I’ve seen HMRC send “nudge letters” to those who miss filing but are reported as receiving dividends by companies. Ignoring these letters risks penalties.
Record-Keeping and Dividend Vouchers
One common mistake: forgetting to keep dividend vouchers. Every company paying dividends should issue these, but small company directors often overlook them when paying themselves.
HMRC can ask for them during an enquiry. Without proper vouchers, you may struggle to prove dividend payments were genuine and not disguised salary. See Keeping records for business for what to keep.
10 Key Takeaways
Dividend allowance for 2025/26 is just £500; anything above this is taxable.
Personal Allowance (£12,570) can shield dividends if not already used by salary or other income.
Max tax-free dividends = £13,070 (if you have no other income).
Dividend tax rates remain 8.75% / 33.75% / 39.35% across the UK.
Scottish and Welsh taxpayers have different earned income rates, but dividend tax bands are UK-wide.
High-Income Child Benefit Charge applies once income exceeds £50,000, including dividends.
Pension contributions can’t be based on dividend income alone; you need salary for “relevant earnings”.
Capital gains interaction means dividends can push you into higher CGT rates.
Self Assessment required if dividends > £10,000, or > £2,500 untaxed.
Keep dividend vouchers and records to avoid HMRC challenges in future.
FAQs
Q1: Can someone split dividends between spouses to stay within tax-free limits?
A1: Well, it’s a clever move to share dividend-paying shares with your spouse or civil partner if they’ve got unused allowances. I’ve seen couples in Manchester halve their tax by each using their own £500 dividend allowance. But remember: the split must be real ownership, not just paperwork.
Q2: Could holding dividends in an ISA make them completely tax-free?
A2: In my experience, that’s a great workaround—the dividends from a Stocks & Shares ISA escape both dividend and income tax entirely. I’ve had clients move income-producing shares into ISAs and cut their tax bills without any fuss. It’s like tax-free zoning for your investments.
Q3: What happens to the dividend allowance if someone’s total income goes over £100,000?
A3: It catches out more people than you’d think—once your income nudges over £100k, your personal allowance starts shrinking by £1 for every £2 over. That eats into the buffer for your dividends. I had a London client drop a few thousand of tax-free space just because of that taper.
Q4: Can someone pay themselves dividends instead of salary if they also want pension tax relief?
A4: Here’s the rub—dividends don’t count as “relevant earnings” for pensions. So if you take just dividends, you can’t get tax relief on big contributions. I often advise small-business directors to take a token salary to unlock pension relief properly.
Q5: Is it true that dividends in kind (shares instead of cash) are tax-free until sold?
A5: Not quite. In my practice, I’ve warned clients that stock-dividends are valued and taxed at market price upon receipt—so they’re not a loophole. It’s like receiving cash; the taxman treats it exactly the same.
Q6: Do jointly held nominee accounts affect dividend tax distribution?
A6: Yes—and here’s a heads-up: dividends in a nominee account are attributed to the beneficial owner, not the nominee. I once helped someone in Edinburgh adjust their Self Assessment after HMRC flagged dividend income reported under the nominee’s name.
Q7: How do foreign dividends affect the UK dividend allowance?
A7: Foreign dividends still bite into your £500 allowance and are taxed like UK dividends—but you may get a credit for foreign withholding tax. I had a client with US investments who avoided double taxation by claiming the credit via Self Assessment.
Q8: Can children receive dividends tax-free?
A8: Children do benefit from the same allowances—£12,570 personal plus £500 dividend—but watch out: if those shares came from parents, HMRC will sometimes apply Parent-Child anti-avoidance rules above £100 of investment income. I’ve helped parents structure share gifts to stay compliant.
Q9: Does dividend income affect the High-Income Child Benefit Charge (HICBC)?
A9: Absolutely, and it's a trap. I’ve seen clients think their dividends are “low impact”—until it’s late and their combined income breaches £50,000, triggering the HICBC. Even modest dividends can push them into repayment territory.
Q10: Can dividend tax be paid in instalments?
A10: Typically not—they’re due via Self Assessment by 31 January. But if someone’s cash is tight, you can ring HMRC for a “Time to Pay” plan. I’ve arranged these for clients who faced unexpected dividend tax in a bad year.
Q11: Is extra dividend tax due if a dividend exceeds £10,000?
A11: No extra rate—just it triggers the need to file a Self Assessment return. I once had a client surprised to get a deadline letter simply because their company dividends crossed that threshold, even though they were within tax-free bands.
Q12: Are dividends liable for National Insurance?
A12: They’re completely NI-free—that’s one of the perks. A former client from Bristol famously reduced his overall tax and NI by switching part of his remuneration from salary to dividends—and it made a noticeable difference to his take-home.
Q13: Can someone offset dividend income with business expenses?
A13: No, dividend tax is personal—business expenses reduce company profits but don’t offset your dividends. One small-biz owner I know accidentally tried to deduct home-office costs against his dividends—I had to gently pull him back to reality.
Q14: What if someone forgets to keep dividend vouchers?
A14: That can be a headache. HMRC might ask during an enquiry, and without vouchers, they'd treat dividends as salary. I've had clients scramble through old bank statements and company minutes just to reconstruct vouchers years later.
Q15: Do multiple jobs affect dividend tax rates?
A15: Yes—total income from all jobs counts, potentially bumping you into a higher dividend rate. I saw a contractor with two part-time jobs assume their dividends were basic rate tax only—until I tallied both salaries and a few small gigs, which pushed part of their dividends into higher rate.
Q16: Is there any relief if dividend income was taxed twice by mistake?
A16: You can reclaim overpaid tax—either via Self Assessment or form R40 if it wasn't included in your return. I once sorted this out for a client whose company accidentally withheld too much dividend tax, and HMRC refunded it within weeks.
Q17: Do Venture Capital Trust (VCT) dividends count toward the allowance?
A17: VCT dividends are tax-free and don’t touch your dividend allowance—one of their big advantages. I've advised high-income investors to allocate part of their portfolio to VCTs for that reason, though they’re higher-risk.
Q18: How does receiving dividends during liquidation work?
A18: Any genuine dividends declared before liquidation are taxed as usual. But once liquidation kicks in, distributions may be treated as capital rather than income. I helped a client sort this when his company went under—they needed clarity whether it was dividend or capital event.
About the Author:
Adil Akhtar, ACMA, CGMA, serves as CEO and Chief Accountant at Pro Tax Accountant, bringing over 18 years of expertise in tackling intricate tax issues. As a respected tax blog writer, Adil has spent more than three years delivering clear, practical advice to UK taxpayers. He also leads Advantax Accountants, combining technical expertise with a passion for simplifying complex financial concepts, establishing himself as a trusted voice in tax education.
Email: adilacma@icloud.com
Disclaimer:
The content provided in our articles is for general informational purposes only and should not be considered professional advice. Pro Tax Accountant strives to ensure the accuracy and timeliness of the information but makes no guarantees, express or implied, regarding its completeness, reliability, suitability, or availability. Any reliance on this information is at your own risk. Note that some data presented in charts or graphs may not be 100% accurate.
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