Dividend tax in the UK, by tax year
Dividends are taxed differently from a salary or trading profit, and the rules have tightened sharply over the last few years. The tax-free allowance has been cut from £2,000 to £500, so a dividend income that produced no tax bill in 2022-23 can produce a real one now. Here's how it works and what's changed.
The Dividend Allowance, year by year
Everyone gets a tax-free Dividend Allowance. Dividends within it are still counted as income (they can push your other income into a higher band), but no dividend tax is charged on them.
| Tax year | Dividend Allowance |
|---|---|
| 2022-23 | £2,000 |
| 2023-24 | £1,000 |
| 2024-25 | £500 |
| 2025-26 | £500 |
Dividend tax rates
Above the allowance, the rate depends on which Income Tax band the dividends fall into. Dividends sit on top of your other income, so they're taxed at the band that income reaches. The rates have been the same across all four years:
| Band | Dividend rate |
|---|---|
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
These are lower than the rates on earned income, which is part of why company directors often take profit as dividends rather than salary.
How dividends stack: a worked example
Say you have £30,000 of salary and £10,000 of dividends in 2025-26. Your Personal Allowance covers the first £12,570. The salary uses up the rest of the allowance and part of the basic-rate band. The dividends sit on top: £500 is covered by the Dividend Allowance, and because your total income is still within the basic-rate band, the remaining £9,500 is taxed at 8.75%, which is £831.25 of dividend tax.
Now push the numbers up. With £45,000 of salary and £10,000 of dividends, some of the dividends spill into the higher-rate band and are taxed at 33.75%. This is why two people with the same dividend income can pay very different amounts. It depends entirely on what other income sits underneath.
Why the cuts matter
When the allowance was £2,000, plenty of small investors and directors paid no dividend tax at all. At £500, far more people are pulled into it. If you take dividends from your own company, it's worth reviewing your salary-versus-dividend mix each year rather than assuming last year's plan still works. For the bigger structural question, see sole trader vs limited company.
Reporting dividends
If your dividend income is above the allowance you'll generally need to report it through Self Assessment. Keep your dividend vouchers and the dates, since dividends are taxed in the year they're paid. As always, the order of the calculation matters: dividends are handled after your main income, with their own allowance and rates.