The dividend allowance has had a rough few years. It stood at £5,000 as recently as 2017, then fell steadily to £1,000 in 2023-24, then dropped again to £500 in 2024-25 — and it has stayed there for 2026-27. At the same time, the government raised dividend tax rates from April 2026, widening the gap between what limited company directors used to pay and what they pay now.

For owner-managed businesses — where drawing a modest salary and topping up with dividends is the standard approach — these changes add up. We are seeing more clients come to us mid-year having underestimated their dividend tax, sometimes by a meaningful amount. This post is our attempt to lay out the current position clearly: what the allowance actually means, how the rates work, and how we tend to think about dividend planning in 2026-27.

The dividend allowance is the amount of dividend income you can receive each tax year without paying dividend tax on it. For 2026-27, that figure is £500. It is separate from, and in addition to, your personal allowance of £12,570 — the two do not overlap.

So in theory, a basic-rate taxpayer with no other income could receive up to £13,070 in dividends before any dividend tax applies: £12,570 covered by the personal allowance and £500 covered by the dividend allowance. In practice, most limited company directors also pay themselves a salary, so the personal allowance is often already partially or fully used before dividends come into the picture.

It is also worth being clear on what the allowance is not. It does not mean dividends up to £500 are tax-free in every sense — they still count towards your income when determining which tax band you fall into. They just are not taxed at dividend rates up to that threshold. It is a subtle distinction, but it matters when you are calculating exactly how much tax is due on dividends that sit above the £500 mark.

One practical point worth noting: if your dividends stay within the allowance and you have no other tax to report, you do not need to report those dividends to HMRC. Once you exceed the allowance, you will typically need to file a Self Assessment tax return to declare the income.

From April 2026, dividend tax rates increased across two of the three bands. Here is how the current rates compare to what applied in 2023-24:

The government framed the increases as a measure to ensure income from assets is taxed more fairly relative to income from employment. Whether you agree with that rationale or not, the practical effect for limited company directors is straightforward: dividend income now costs more.

To put some numbers on it: if you draw £30,000 in dividends and you are a basic-rate taxpayer, the 2% rate increase on the taxable portion means you are paying roughly £580 more per year compared to 2023-24 rates — before accounting for the reduction in the allowance itself. That is not catastrophic, but it is real money, and it compounds with other changes that have happened over the same period.

We think the honest message here is that dividends are still a tax-efficient way to extract profit from a limited company compared to taking the same amount purely as salary — but the margin has narrowed, and the planning matters more than it used to.

One of the things that trips people up is that dividend tax rates depend on your total income, not just your dividends in isolation. Dividends sit on top of your other income — salary, rental income, freelance income — when HMRC works out which band they fall into.

The most common structure we see is a limited company director taking a salary around the National Insurance threshold (often in the region of £12,570) and drawing the rest of their income as dividends. In that scenario, most of the dividend income typically falls into the basic-rate band, currently taxed at 10.75%.

But if total income — salary plus dividends — exceeds £50,270, the portion above that threshold moves into the higher-rate band at 35.75%. That is a significant jump, and it is one of the points where proactive planning makes a real difference. Knowing in advance roughly how much dividend income you intend to draw means you can pace distributions across the tax year, or consider whether retained profits in the company might be better used in other ways.

It is also worth remembering that dividends are not subject to National Insurance contributions — neither employer’s nor employee’s NI. That remains one of the structural reasons why the salary-plus-dividends approach is still widely used, even after the recent rate increases. The comparison to a PAYE-only arrangement still usually favours the limited company structure for most owner-managers, though the numbers are tighter than they were.

This sounds obvious, but it is genuinely one of the more common compliance issues we encounter. Dividends can only legally be paid from a company’s retained profits — that is, profits remaining after corporation tax has been accounted for. You cannot simply declare a dividend because there is cash in the company’s bank account; the cash needs to correspond to distributable reserves.

Paying a dividend when there are insufficient retained profits makes it an unlawful dividend, which creates a personal liability for the director. In practice, this tends to happen when a company’s accounts have not been kept up to date and the director does not have a clear picture of what the profit position actually is — which is precisely the kind of situation that good bookkeeping and regular management accounts are designed to prevent.

The process itself is straightforward when the numbers are right: the director(s) declare the dividend, a board minute is recorded, and dividend vouchers are issued to shareholders. It does not need to be complicated, but it does need to be done properly. If you are drawing from your company regularly and are not entirely sure whether your retained profits support those withdrawals, that is worth clarifying sooner rather than later. An unexpected unlawful dividend can create problems at the point of year-end accounts — and sometimes with HMRC.