The dividend allowance for 2025/26 is £500. That means you can receive up to £500 in dividend income each tax year without paying any dividend tax on it — provided you’ve already used your personal allowance, or the dividends themselves sit within it.

For most limited company directors who pay themselves a combination of salary and dividends, £500 is not a lot of headroom. A decade ago, the allowance stood at £5,000. Today it’s a tenth of that, and the rates you pay above it have crept up too. The tax landscape for dividends has shifted considerably, and it’s worth understanding exactly where you stand — both for 2025/26 and for the 2026/27 tax year, which brought further rate increases from April 2026.

In this post we’ll walk through how the allowance works, what rates apply at each income band, and what the changes mean in practice for a typical director drawing a modest salary topped up with dividends.

The dividend allowance isn’t a separate tax-free bucket sitting alongside your personal allowance — it’s a zero-rate band that applies specifically to dividend income. The mechanics matter, because they affect which slice of your income gets taxed at which rate.

Your personal allowance (£12,570 for 2025/26) covers all income first. If your salary uses up most of it, your dividends fall in above that threshold. The £500 dividend allowance then applies to the first £500 of dividends, taxed at 0%. Everything above that is subject to dividend tax at the rate that corresponds to your income tax band.

So in a common director scenario — say a salary of £12,570 and dividends on top of that — almost all of those dividends are being taxed, with only the first £500 sheltered. It’s worth being clear on this: the £500 doesn’t reduce the tax owed on the rest; it simply means the first £500 is charged at zero rather than the basic rate.

One important exception worth noting: dividends received from shares held inside a Stocks and Shares ISA are entirely free of dividend tax, regardless of the allowance. If you hold investments personally as well as running a company, an ISA is worth considering for the investment side of things.

Once you move above the £500 allowance, dividend tax rates for 2025/26 depend on which income tax band your total income falls into:

• Basic rate taxpayers — 8.75% on dividends above the allowance
• Higher rate taxpayers — 33.75% on dividends falling into the higher rate band
• Additional rate taxpayers — 39.35% on dividends above £125,140

These rates are notably higher than the equivalent income tax rates — which is partly offset by the fact that dividends come from company profits that have already been subject to corporation tax. The combined effect means dividends are still generally more tax-efficient than an equivalent salary for most basic rate directors, but the gap has narrowed considerably compared to where it stood a few years ago.

It’s also worth remembering that dividends don’t attract National Insurance contributions — neither employee nor employer — whereas salary does. That difference remains significant and is one reason the salary-plus-dividends approach continues to make sense for many directors, even with the reduced allowance.

If you’re unsure how your total income breaks down across bands, your accountant should be modelling this for you at least once a year. A small tweak to the split between salary and dividends can sometimes make a meaningful difference to the overall tax bill.

Since we’re now in the 2026/27 tax year, it’s worth addressing the changes that came into effect from April 2026 — because if you’re reading this to understand your current position, these rates now apply to you.

For 2026/27, the dividend allowance remains at £500 — so no change there. But the tax rates on dividends above the allowance have increased:

• Basic rate — up from 8.75% to 10.75%
• Higher rate — up from 33.75% to 35.75%
• Additional rate — unchanged at 39.35%

For a director drawing a salary of £12,570 and dividends of £37,700 — which keeps total income just within the basic rate band — the increase in the basic rate from 8.75% to 10.75% results in roughly an additional £744 in dividend tax per year. That’s not catastrophic, but it’s not trivial either, and it compounds the effect of the allowance reduction over recent years.

The practical message: if you haven’t reviewed your remuneration strategy since 2025, now is a good time to do so. The cumulative impact of lower allowances and higher rates means the old rules of thumb around how much to draw as dividends may need revisiting.

It’s worth stepping back for a moment, because the trend here tells its own story. The dividend allowance was introduced in 2016/17 at £5,000 — a reasonably generous tax-free band that made the limited company structure attractive for a wide range of self-employed professionals. Since then, it has been cut repeatedly:

• 2016/17 to 2017/18: £5,000
• 2018/19 to 2022/23: £2,000
• 2023/24 to present: £500

That’s a 90% reduction in the allowance over roughly eight years, alongside two rounds of rate increases. The direction of travel from government has been clear: dividend income should bear more tax than it once did, and the preferential treatment of owner-managed companies is being steadily narrowed.

We’re not saying the limited company structure no longer makes sense — for many contractors and directors, it still does. But anyone who incorporated primarily because of the tax advantages should be reviewing the numbers regularly rather than assuming the old calculations still hold. The strategy that was right in 2018 may not be right in 2026.

This is exactly the kind of thing we work through with clients as part of an annual tax review — looking at the actual numbers for their specific income level, rather than relying on rules of thumb that may be several years out of date.