What Is Dividend Tax?
By PayMetric Labs Research Desk
Short answer
Dividend tax is the Income Tax charged on dividends you receive from a company, including your own limited company, at rates of 10.75% (basic), 35.75% (higher), and 39.35% (additional) for 2026/27.
If you run a UK limited company, dividend tax matters because it's the second half of the standard contractor extraction route: pay Corporation Tax on company profit first, then dividend tax when you draw the remainder out to yourself personally. Since 6 April 2026, the basic rate rose from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%; the additional rate stayed at 39.35%.
Every taxpayer gets a £500 annual dividend allowance (unchanged in 2026/27), meaning the first £500 of dividend income each year is tax-free regardless of your other income. Above that, dividends stack on top of your other income to determine which band they fall into, so if your salary already fills your basic rate band, most of your dividends land at the higher rate.
Dividends are taxed in the year they're paid, not when the underlying profit was earned, which gives directors some control over timing: deferring a dividend by a few days can shift it into a different tax year if that helps your overall position.
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This glossary entry is for general information only and does not constitute financial, tax, or legal advice. Rates and thresholds shown reflect current published guidance and may change.