Dividend Tax 2025/26: How the £500 Allowance Works & How to Cut Your Bill 💷📉| Accountants In Essex

If you’re a company director, shareholder, or investor in the UK, you’ve probably noticed more and more people are paying dividend tax — even those who never had to before.

For the 2025/26 tax year, the dividend allowance has been slashed to just £500 per year.

That means if you receive dividends over that amount, you could be paying more tax than you expect.

As trusted accountants in Essex, here’s everything you need to know — and how to make sure you’re not paying more than you should.

📅 What Is the Dividend Allowance in 2025/26?

The dividend allowance is the amount of dividend income you can receive each tax year without paying any dividend tax.

• 2023/24 – £1,000 allowance

• 2024/25 – £500 allowance

• 2025/26 – £500 allowance (no change from last year, but much lower than before)

This allowance applies to everyone, regardless of your income tax band or whether you complete a Self Assessment tax return.

📈 How Much Dividend Tax Will You Pay?

Once you’ve used your £500 allowance, dividend income is taxed at:

• 8.75% – Basic rate taxpayers

• 33.75% – Higher rate taxpayers

• 39.35% – Additional rate taxpayers

💡 Example: If you’re a director of a limited company taking £10,000 in dividends, the first £500 is tax-free, the rest is taxed at your income tax rate.

🧾 Do You Need to Do a Tax Return for Dividends?

Yes — if your dividend income pushes you above the allowance, you’ll usually need to declare it via a Self Assessment tax return. HMRC uses this to calculate your tax return payment.

Even if your only extra income is from dividends, you may still have to register for Self Assessment and meet the tax return deadline of 31 January 2026 for the 2024/25 tax year.

💡 How to Reduce Dividend Tax Legally

Here’s how our clients reduce their dividend tax bill:

✅ Use ISAs – Dividends from shares in an ISA are completely tax-free.

✅ Share income with your spouse – If they have unused allowance, you can transfer shares to split dividend income.

✅ Pension contributions – Reduce your taxable income and potentially keep more dividends in the lower tax band.

✅ Salary vs dividend mix – Optimise the balance to use your personal allowance and National Insurance thresholds.

📊 Why Are More People Paying Dividend Tax?

This is the smallest allowance we’ve seen in years, and it comes at a time when interest rates, business profits, and investment returns are rising. A record 3.7 million people are now paying dividend tax — more than double from just two years ago.

🏦 How Accountants in Essex Can Help

At our firm of accountants in Essex, we help limited company directors, investors, and shareholders:

• Plan for dividend tax

• Optimise salary and dividends

• Avoid unnecessary tax payments

• Ensure your tax return is correct and on time

We also review your situation to check if you can reclaim overpaid tax or adjust your approach for the new tax year 2025/26.

📩 Get in touch today for expert advice — and make sure the HMRC dividend tax changes don’t take more of your profits than they should.

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