Dividend Tax Calculator UK 2025/26

Why Do Limited Company Directors Use Salary + Dividends?

Most UK limited company directors structure their remuneration as a combination of a small salary and dividends. This is more tax-efficient than taking a large salary because:

• Dividends are not subject to National Insurance, saving both employee NI (8–2%) and employer NI (15%) compared to an equivalent salary.
• Dividend tax rates are lower than income tax rates at the same income level (8.75% vs 20% in the basic rate band, 33.75% vs 40% in the higher rate band).
• The company pays corporation tax on its profits, but the combined burden of corporation tax + dividend tax is generally lower than income tax + NI on the equivalent salary.

The £12,570 Salary Strategy Explained

Most directors set their salary at exactly £12,570, the Personal Allowance. Here's why:

• The salary is fully covered by the Personal Allowance, so zero income tax is due on it.
• At £12,570 the salary sits at the employee NI threshold, so no employee NI is payable.
• The company can deduct the salary as a business expense, reducing its taxable profit and therefore corporation tax.
• The salary keeps the director's National Insurance record active, protecting their entitlement to the State Pension and other contributory benefits.

Note: employer NI is payable on salary above £5,000 (the secondary threshold from April 2025). On a £12,570 salary this amounts to £1,135.50. Sole directors are not eligible for the Employment Allowance.

Dividend Allowance 2025/26

Every individual receives a £500 dividend allowance each tax year. The first £500 of dividend income is tax-free (above the Personal Allowance). This was cut from £2,000 to £1,000 in April 2023, and again from £1,000 to £500 in April 2024, and remains at £500 for 2025/26.

When Do Higher Rates Kick In?

Dividend tax rates increase as your total income crosses the rate band thresholds:

• 8.75% on dividends within the basic rate band (total income up to £50,270)
• 33.75% on dividends within the higher rate band (total income £50,271–£125,140)
• 39.35% on dividends within the additional rate band (total income above £125,140)

Remember that salary and dividends stack: salary sits in the lower bands first, and dividends fill the remaining space above.

Self Assessment and Dividend Payments

Dividend income must be reported on a Self Assessment tax return. Directors typically pay dividends quarterly or annually. Key points:

• Dividends can only be paid from distributable profits (the company must have made sufficient profits after tax).
• A dividend voucher must be issued each time a dividend is paid, showing the company name, date, amount, and shareholder details.
• If dividends are paid without sufficient profits, they become illegal dividends (also called ultra vires dividends) and must be repaid.
• The Self Assessment deadline is 31 January following the end of the tax year, with payment due on the same date.