Dividend allowance
The dividend allowance is the amount of dividend income you can receive each tax year before dividend tax applies. For 2026/27 it is £500. Dividends above it are taxed at 10.75%, 35.75% or 39.35% depending on your total income.
Also known as: tax-free dividend allowance, dividend nil rate band
How it works
The dividend allowance is a nil rate band rather than an exemption. The dividends covered by it still count as income when working out which tax band the rest of your income falls into, so a large dividend can push other income into a higher band even though the first slice is taxed at nothing.
For 2026/27 the allowance is £500. Above that, dividends falling in the basic rate band are taxed at 10.75%, those in the higher rate band at 35.75% and those above the additional rate threshold of £125,140 at 39.35%. Your personal allowance of £12,570 can be set against dividend income where you have no other earnings, which is why a small salary plus dividends is still a common structure.
Dividends are paid out of post-tax profit, so the company has already paid corporation tax on the money. There is no National Insurance on dividends, which is the main reason they usually beat extra salary for an owner-director, but the comparison changes with profit level and the employment allowance position.
A dividend is only legal if the company has distributable reserves, meaning accumulated realised profits after tax. Check the reserves, hold a board meeting, minute the decision and issue a dividend voucher for each payment. Without that paperwork HMRC can argue the payment was salary or a director's loan.
Dividend income is reported through self assessment. If dividends are your only untaxed income and the total is modest, HMRC may collect the tax through your PAYE code instead, but you still need to tell them.
Worked example (2026/27)
£9,100 salary plus £40,000 dividends (2026/27)
| Salary | £9,100 |
|---|---|
| Dividends | £40,000 |
| Personal allowance used against dividends | £3,470 |
| Covered by dividend allowance | £500 |
| Taxed at 10.75% | £36,030 → £3,152.63 |
Assumes no other income and the standard personal allowance of £12,570.
Who this affects
- Owner-directors taking a small salary plus dividends
- Contractors outside IR35 drawing company profit
- Spouses or family shareholders holding shares in the company
- Founders with dividends alongside employment income elsewhere
- Investors holding shares outside an ISA
Common mistakes
- Treating the allowance as income that does not count towards the tax bands
- Paying dividends when the company has no distributable reserves
- Skipping board minutes and dividend vouchers
- Forgetting that dividend tax is paid personally in January, not by the company
Frequently asked questions
How much dividend can I take tax free in 2026/27?
£500 under the dividend allowance, plus any unused personal allowance of £12,570 if you have little or no other income.
Do dividends count towards the higher rate threshold?
Yes. Dividends sit on top of your other income, so they can push you past £50,270 even when part of them is covered by the allowance.
Is salary or dividend better?
Usually a salary up to the National Insurance threshold followed by dividends, but the right split depends on profit, employment allowance and pension contributions.
Related terms
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Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
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