The dividend allowance for the 2026/27 tax year is £500. That is the amount of dividend income you can receive before any tax becomes due. For anyone running a limited company who uses dividends as part of their remuneration strategy, it is a number worth knowing precisely — because it has dropped significantly from where it stood just a few years ago.

Back in 2017/18 the allowance sat at £5,000. It fell to £2,000, then to £1,000, and from April 2023 it settled at £500 where it remains today. Alongside that, the rates themselves have risen from 6 April 2026. This is not a minor administrative update — it is a genuine change to the cost of extracting profits from your company.

In this post we walk through the current position, what the new rates actually mean in practice, and how we tend to think about dividend planning with clients.

For 2026/27, the first £500 of dividend income you receive each year is tax-free, regardless of which tax band you fall into. Above that threshold, dividends are taxed according to your marginal rate of income tax — though at lower rates than earned income.

The rates that apply from 6 April 2026 are:

• Basic rate taxpayers: 10.75% on dividends above the £500 allowance
• Higher rate taxpayers: 35.75%
• Additional rate taxpayers (income above £125,140): 39.35%

Those basic and higher rates both increased from April 2026 — up from 8.75% and 33.75% respectively. The additional rate was already at 39.35% and has not changed.

It is worth being clear about how the allowance interacts with these bands. Dividends are treated as the top slice of your income, sitting above salary, rental income, and savings interest. So if your salary already takes you to the higher-rate threshold, all dividends above £500 are taxed at 35.75% — not the basic rate. That distinction catches out a number of director shareholders, particularly those whose salary and dividends together push them over the £50,270 threshold.

For most owner-managed limited company directors taking a modest salary alongside dividends, the basic rate of 10.75% will apply to the bulk of what they draw — but the maths still needs doing carefully.

The practical effect of the £500 allowance is straightforward but worth spelling out. If you take £40,000 in dividends in 2026/27 and are a basic rate taxpayer, the first £500 is tax-free. The remaining £39,500 is taxed at 10.75%, giving you a dividend tax bill of roughly £4,246. Compare that with a scenario where the allowance was still £5,000 — the bill would have been approximately £3,762. The difference is not enormous in isolation, but across a working lifetime, or when you scale it to larger dividend amounts, it compounds.

The more significant shift in recent years has been for higher earners. A director drawing £80,000 in dividends — not unusual for an established owner-managed business — faces a higher-rate bill of 35.75% on everything above that £500 allowance. That is a meaningful effective rate on profits that have already been subject to corporation tax at 25%.

This is one reason we always look at the full picture with clients rather than dividend planning in isolation. The combination of corporation tax, dividend tax, and any National Insurance on salary produces a total effective rate that needs to be understood before decisions are made about how much to draw, and when.

It is also worth noting that the £500 allowance applies per individual — so if you have a spouse or partner who also holds shares in the company, they each have their own allowance and their own tax bands to use.

The conventional wisdom for limited company directors — take a small salary up to the National Insurance secondary threshold, then draw the rest as dividends — remains broadly sound. Dividends are still taxed at lower rates than salary, and the employer National Insurance saving on the salary element still holds.

But the gap has narrowed. In 2017, a director could take £5,000 of dividends with no tax at all, and any additional dividends were taxed at 7.5%. Today that basic rate stands at 10.75% and the free allowance is £500. The structural advantage remains, but it is less dramatic than it once was.

What this means in practice is that the decision about how much to draw as dividends, and when, deserves more attention than it used to. Some clients are better served by leaving more profit in the company — either for future investment, to draw in a later tax year when their income may be lower, or as part of a pension contribution strategy. Corporation tax at 19% or 25% followed by a dividend tax is still often better than income tax at 40% plus National Insurance, but it requires the arithmetic to be done properly.

We also see clients who inadvertently push themselves into a higher tax band mid-year because they have not tracked their cumulative drawings. Staying across the numbers month to month, rather than reviewing once a year with a retrospective surprise, is a straightforward way to stay in control. That is exactly the kind of proactive support we build into how we work with limited company clients.

Dividends from a limited company must be declared on your Self Assessment tax return if your total dividend income exceeds £500, or if you are a higher or additional rate taxpayer receiving any dividends at all. This is an area where errors are common, and HMRC does cross-reference company records with personal tax returns.

Informal drawings treated as dividends

One issue we encounter regularly is directors taking money from the company account without formally declaring a dividend — no board minute, no dividend voucher. HMRC may treat unrecorded payments as a salary (subject to PAYE and NI) or a director’s loan (which carries its own tax implications under the section 455 rules). The paperwork matters.

Dividends paid when no distributable reserves exist

A dividend can only be paid from accumulated profits. Paying a dividend when the company has insufficient retained profits makes it an unlawful dividend, which creates both legal and tax complications. This is particularly relevant for newer companies or those that have had a difficult trading year.

Forgetting dividend income from other sources

Many business owners also hold ISAs, investment portfolios, or shares in other companies. Dividends received outside an ISA wrapper count towards the £500 allowance. If you receive £300 from your portfolio and £400 from your own company, you have already exceeded the allowance before you get to the bulk of your remuneration planning.

Getting these details right is part of what Self Assessment is for — and part of what we help clients work through each year.