Question 1

How are dividends taxed in the UK?

Accepted Answer

Dividends are taxed after your other income (salary, rental, etc.). The first £500 of dividends each year is tax-free (the dividend allowance). Above that, dividends are taxed at 8.75% if they fall in your basic-rate band, 33.75% in the higher-rate band, and 39.35% in the additional-rate band. Because dividends sit on top of your other income, a higher salary pushes more dividends into higher tax bands.

Question 2

What is the dividend allowance?

Accepted Answer

The dividend allowance is an annual tax-free amount for dividend income. For 2026/27 it is £500. It was reduced from £1,000 in 2023/24, and from £2,000 in 2022/23. All taxpayers get this allowance regardless of their rate band. The allowance still counts towards your income for band-placement purposes; it is simply taxed at 0%.

Question 3

What is the optimal salary/dividend split for a company director?

Accepted Answer

Most owner-directors set their salary at the secondary (employer) National Insurance threshold of £9,100 for 2026/27. This avoids both employee NI (charged above £12,570) and employer NI (charged above £9,100). If your company qualifies for the Employment Allowance (up to £10,500 in 2026/27), taking salary at the personal allowance level of £12,570 may be more efficient as it uses your full income tax-free amount. Sole-director companies generally cannot claim the Employment Allowance from April 2020 onwards.

Question 4

Do I need to complete a Self Assessment tax return for dividends?

Accepted Answer

Yes, if you receive dividends above the £500 allowance, you must register for Self Assessment and report them on a tax return. HMRC will not automatically collect dividend tax through PAYE. The Self Assessment deadline for online returns is 31 January following the end of the tax year. If your total dividends are between £500 and £10,000 and you are already in PAYE, you may be able to pay the tax through your tax code instead of filing a full return.

Question 5

Are dividends subject to National Insurance?

Accepted Answer

No. Unlike salary, dividends are not subject to National Insurance contributions. This is one of the main tax advantages of drawing income from a limited company as dividends rather than salary. However, dividends are paid from company profits after corporation tax, so the combined tax burden depends on both corporation tax and income tax on dividends.

Question 6

How does the £100,000 income trap affect dividends?

Accepted Answer

If your total income (including dividends) exceeds £100,000, your personal allowance is reduced by £1 for every £2 above that threshold, and is fully withdrawn at £125,140. This creates an effective 60% income tax rate on income between £100,000 and £125,140 for non-dividend income. For dividends falling in this band the effective rate is lower, but careful income planning (such as pension contributions to bring income below £100,000) can preserve the personal allowance.

Band	Taxable Amount	Rate	Tax
Basic rate (8.75%)	£29,500	8.75%	£2,581
Total dividend tax			£2,581

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