If you run a limited company, dividends are your best friend. They’re the most tax-efficient way to get money out of your company and into your pocket. But the rules have changed significantly in recent years — the tax-free allowance has been hacked down from £2,000 to just £500, and the effective rates aren’t as generous as they used to be.
The Dividend Allowance
For 2025/26, you can receive £500 in dividends tax-free. That’s it. It was £2,000 until April 2023, fell to £1,000, and hit £500 in April 2024. For most company directors, this barely registers. Nearly all your dividend income is now taxable.
Dividend Tax Rates
Above the £500 allowance, dividends are taxed at:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
These are lower than equivalent income tax rates because the company has already paid Corporation Tax on the profits before distributing them. The combined hit on corporate profits paid out as dividends works out at roughly 46% for a higher-rate taxpayer. Not nothing, but still better than the alternative.
The Salary-and-Dividend Strategy
Most company directors use a specific approach to minimise tax. For 2025/26, the go-to strategy is:
- Pay yourself a salary up to the NI Primary Threshold (£12,570) — uses your Personal Allowance, qualifies you for State Pension, no NI to pay
- Take the rest as dividends up to the basic-rate band limit (£50,270 total income)
- If you need more, weigh up whether the higher dividend tax rate is acceptable or if there are smarter ways to extract the money
Take Lisa, an IT consultant in Bristol earning £50,000 through her limited company. Using this strategy, she pays about £2,700 in dividend tax. If she took the whole £50,000 as salary, she’d pay roughly £7,500 in income tax and NI. That’s £4,800 a year saved. Every year.
Why Dividends Beat Salary
Two reasons: no National Insurance on dividends (saving both employee and employer NI), and lower headline tax rates. But remember, dividends come from post-Corporation Tax profits, so you need to factor in the 25% the company already paid.
For basic-rate taxpayers, the combined rate on dividends (Corp Tax + dividend tax) is about 26.5%, versus roughly 33.25% for salary (income tax + both NI classes). The gap narrows at higher rates but dividends still win.
Planning Ideas
- Spouse as shareholder: If your partner is a basic-rate taxpayer or earns under the Personal Allowance, giving them shares means their dividends are taxed at their lower rate. But the shares must carry genuine rights and your spouse must be a real shareholder — HMRC won’t accept a sham arrangement.
- Pension contributions from the company: Extremely tax-efficient. The company contribution is deductible for Corporation Tax, and there’s no income tax or NI for you. It’s probably the most efficient way to extract value above the basic-rate band.
- Retained profits: If you don’t need the money right now, leave it in the company. You delay the dividend tax until you actually take it out, and you can time withdrawals around tax bands.
Work Out Your Dividend Tax
Our free dividend tax calculator shows exactly how much you’ll pay on your dividends, compares the salary-vs-dividend position, and helps you find the best mix for your circumstances. Takes a couple of minutes.