The dividend allowance for 2025/26 is £500. That means you could receive up to £500 in dividend income outside an ISA without paying any dividend tax on it. Simple enough — but the question most directors are really asking is what happens to the rest, and whether their current salary and dividend split still makes sense given where rates are heading.

We work with a lot of small limited company directors who pay themselves through a combination of salary and dividends. The allowance itself hasn’t changed in a couple of years, but the tax rates above it are rising. For the 2026/27 tax year, which started in April 2026, the rates went up by two percentage points for basic and higher rate taxpayers. That shift is worth understanding, even if you’re trying to file or review the 2025/26 year.

The dividend allowance is not a personal allowance top-up. It sits separately from your £12,570 personal allowance and operates as a zero-rate band specifically for dividends. So your first £12,570 of total income is covered by the personal allowance (assuming you haven’t lost any of it through earnings above £100,000), and then the first £500 of dividend income above that is taxed at 0%.

Everything beyond £500 is taxed at the dividend rate for whichever income band you fall into. The allowance doesn’t roll over, and it can’t be transferred to a spouse or civil partner in the way that unused personal allowance can be (though married couples with shareholdings in the company can sometimes arrange things more efficiently — that’s a separate conversation).

One thing worth flagging: dividends from shares held inside a Stocks and Shares ISA don’t count toward your allowance at all. They’re tax-free regardless. If you hold investments outside a pension or ISA and receive dividends on them, those do count, so it’s worth keeping track if you have multiple income sources.

For the 2025/26 tax year, the dividend tax rates above the £500 allowance were:

• Basic rate taxpayer: 8.75%
• Higher rate taxpayer: 33.75%
• Additional rate taxpayer: 39.35%

Your dividend income is stacked on top of your other income when working out which band you fall into. So if you draw a salary of £12,570 and then take dividends on top, the first £500 of dividends is covered by the allowance, and everything else up to the basic rate limit of £50,270 (personal allowance plus basic rate band) is taxed at 8.75%.

That 8.75% rate is significantly lower than the 20% you’d pay on equivalent employment income at the basic rate. That gap is precisely why the salary-plus-dividends approach has been the standard structure for small company directors for years. It still works, but the gap has been narrowing — and from April 2026 it narrowed further.

For 2026/27 onwards, dividend tax rates increased by two percentage points for basic and higher rate payers. The rates now stand at 10.75% (basic), 35.75% (higher), and 39.35% (additional — unchanged). The £500 allowance itself stays at £500 for 2026/27 as well.

The government’s stated reasoning is that it wants to narrow the difference between tax on employment income and tax on income from assets. Whether you think that’s fair or not probably depends on which side of the equation you’re on, but the direction of travel is clear: successive cuts to the dividend allowance (from £5,000 in 2017/18 down to £500 now) and now rising rates.

In practice, for a basic rate director drawing a £12,570 salary and £40,000 in dividends, the extra two percentage points on roughly £39,500 of taxable dividends amounts to around £790 more tax per year. That’s not catastrophic, but it’s real money, and it’s why we’re having more conversations with clients about whether their current structure is still optimal. The answer is usually yes — dividends are still more efficient than salary at the same income level — but the margin is smaller than it used to be.

If your total dividend income for the year stays within the £500 allowance and you have no other reason to file a Self Assessment, you don’t need to do anything. HMRC won’t chase you for tax on dividends under the threshold.

Once your dividends exceed £500, you’re expected to report them. If you’re already in Self Assessment — which most directors are — this is handled through your annual tax return. If you’re not in Self Assessment and you receive dividends above the allowance, you need to register and file, or use HMRC’s online service to ask them to adjust your tax code.

Where people run into trouble is when they assume the allowance is larger than it is, or when they forget that dividends from multiple shareholdings all count toward the same £500. We’ve seen clients receive a small dividend from an employer share scheme alongside their company dividends and not account for the combined total. It doesn’t result in large bills, but it does result in unexpected letters from HMRC — which is the kind of thing that causes unnecessary stress.

If you’re a director drawing dividends and you’re unsure whether your current setup is being reported correctly, our Self Assessment service covers exactly this.