If you run your own limited company and pay yourself a combination of salary and dividends, the dividend allowance for 2025/26 is one of the first figures you need to know. For the 2025/26 tax year, that allowance stands at £500. It is the amount of dividend income you can receive each year without paying any dividend tax on it, sitting on top of your personal allowance.

That might sound modest, and honestly it is. The allowance was £5,000 as recently as 2017/18, and the reductions since then have been significant. But the mechanics still matter, because combining the personal allowance, the dividend allowance, and the right salary level is still one of the most straightforward ways for director-shareholders to reduce their overall tax bill. Getting the numbers right is worth doing.

The dividend allowance does not reduce your total income for tax purposes. Instead, it sets a threshold below which dividend income is charged at 0%. Any dividends you receive above that £500 are taxed at rates that depend on which income tax band they fall into.

There is also an important interaction with your personal allowance. The personal allowance for 2025/26 is £12,570. If your total income, including any salary, falls below that figure, those dividends are effectively sheltered by the personal allowance first and you pay no tax on them at all. The £500 dividend allowance then applies on top of the personal allowance, not instead of it.

So in practice, a director taking a salary of £12,570 and then drawing dividends would see the first £500 of those dividends taxed at 0% under the dividend allowance. Anything above that would fall into the basic rate band and attract the 8.75% dividend tax rate that applied during 2025/26.

It is a simple enough structure, but the interaction between salary, personal allowance, and dividend allowance is the part that trips people up most often. The order in which your income is taxed matters, and small changes to your salary level can shift a meaningful amount of dividend income across a tax band boundary.

Once your dividends exceed the £500 allowance and your personal allowance is used up, you pay dividend tax at the following rates for the 2025/26 tax year:

• Basic rate taxpayer: 8.75%
• Higher rate taxpayer: 33.75%
• Additional rate taxpayer (income over £125,140): 39.35%

These rates are applied to the dividend income that sits above your allowances, not on the full amount of dividends you receive. Dividend income is treated as the top slice of your income, so it is stacked on top of your salary when HMRC works out which band it falls into.

One thing worth flagging: from 6 April 2026, the basic rate rises to 10.75% and the higher rate rises to 35.75%. The additional rate stays at 39.35%. If you are reading this while planning for 2026/27 income, those are the rates that now apply. The allowance itself stays at £500 for 2026/27 as well, so that part of the picture has not changed.

Dividends received from shares held inside an ISA are a separate matter entirely. Those are not subject to dividend tax regardless of the amount, which is worth bearing in mind if you hold investments as well as company shares.

The reduction of the dividend allowance from £2,000 to £500 in April 2023 was not trivial. For a basic rate taxpayer drawing significant dividends, that change alone cost an additional £131.25 in tax per year (the extra £1,500 at 8.75%). For a higher rate taxpayer, it was more like £506.25.

More importantly, the cut reduced the margin for error in dividend planning. With a £5,000 or even £2,000 allowance, there was meaningful headroom. At £500, there is almost none, and the importance of getting your salary and dividend split right from the start of the tax year has grown accordingly.

We see this quite often with new director-shareholders who take their first dividends without thinking through the timing. If you draw large dividends early in the tax year without knowing your likely total income, you can end up paying more tax than you needed to, simply because you did not account for how your salary interacted with your allowances.

The other thing the lower allowance has changed is the value of spousal dividend planning. If your partner has unused personal allowance or a lower marginal rate, structuring shareholdings thoughtfully (with proper legal advice, and where it reflects genuine economic reality) can make the difference between a well-run tax position and a missed opportunity. This is not about aggressive avoidance. It is about using the allowances that exist.

For most of our clients who run their own limited companies, the standard approach is to take a salary up to the National Insurance secondary threshold (or the primary threshold, depending on their circumstances) and draw the rest of their income as dividends. The personal allowance and the £500 dividend allowance work together to reduce the tax on those dividends.

But the numbers only work if the company has sufficient retained profits to support the dividends you want to take. Dividends can only be paid out of distributable profits, not out of cash you happen to have in the bank. If your company has not made enough profit, paying yourself a dividend is not legally valid, and that can create problems down the line.

There are also timing considerations. The 2025/26 tax year ran from 6 April 2025 to 5 April 2026. If you want to optimise your dividend income for that year, the timing of any declarations matters. Dividends declared after 5 April 2026 fall into 2026/27, which means they are subject to the higher rates that came in from that date.

If you are unsure how much you have taken in dividends across 2025/26, or whether you have declared them correctly, your accountant can help you work through the numbers before your self assessment return is due. Getting this sorted early is a lot less stressful than piecing it together at the deadline.