Dividends are taxed differently from salary. You get a £500 tax-free dividend allowance for 2025/26, and dividends above that are taxed at 8.75, 33.75 or 39.35 percent depending on which Income Tax band they fall into once stacked on top of your other income. This is popular with company directors deciding on a salary-versus-dividend split.
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Frequently asked questions
Why does my other income matter?
Dividends sit on top of your other income when working out the band, so a higher salary pushes more of your dividends into the higher-rate dividend rate.
Is the dividend allowance on top of the personal allowance?
Yes. Unused personal allowance can cover dividends first, then the separate £500 dividend allowance applies before any dividend tax is due.