The Dividend Allowance in 2026: How Much Can You Take Tax-Free?

The dividend allowance in 2026/27 is £500, which means the first £500 of dividends you receive each tax year is taxed at 0% regardless of your income. Combined with any unused personal allowance, that figure determines how much a company owner can extract tax-free before dividend tax begins. Getting this right sits at the heart of any director salary dividend strategy UK 2026, because the balance between salary and dividends decides your total tax bill. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, helps company directors structure their pay to keep more of what their business earns. This article explains the £500 allowance, the 2026/27 dividend tax rates, and how much you can genuinely take tax-free, with worked figures.

Key Takeaways

• The dividend allowance for 2026/27 is £500, meaning the first £500 of dividends is taxed at 0% for every taxpayer.
• Dividend tax rates rose from 6 April 2026 to 10.75% (ordinary rate), 35.75% (upper rate), and 39.35% (additional rate).
• A director paying themselves a £12,570 salary can take £500 of dividends completely tax-free, using the dividend allowance on top of the full personal allowance.
• Where salary is set at the £6,708 Lower Earnings Limit, unused personal allowance can shelter further dividends, raising the tax-free dividend total to around £6,362.
• Dividends above the allowance and up to £50,270 of total income are taxed at 10.75% for 2026/27, then 35.75% up to £125,140.
• Dividends are not deductible for corporation tax, so the optimal salary dividend limited company split must weigh corporation tax relief on salary against lower personal dividend rates.

What is the dividend allowance in 2026/27?

The dividend allowance is a £500 band of dividend income taxed at 0% in the 2026/27 tax year, available to every individual on top of any unused personal allowance. It is not a separate tax-free amount in the way a true allowance would be; it is a zero-rate band that still uses up part of your basic-rate band. In practice, the first £500 of dividends carries no tax, but that £500 counts towards your total income when working out which band later dividends fall into.

The allowance has fallen sharply in recent years, from £2,000 to £1,000 and now £500, so more of a director's dividend income is taxable than in the past. Every shareholder receives the £500 allowance, so spouses who both hold shares each have their own.

What are the dividend tax rates for 2026/27?

Dividend tax rates for 2026/27 are 10.75% at the ordinary rate, 35.75% at the upper rate, and 39.35% at the additional rate. These rates increased from 6 April 2026. The ordinary rate was previously 8.75% and the upper rate was previously 33.75%, while the additional rate held at 39.35%. The rate you pay depends on the tax band your dividends fall into once salary and other income are counted.

Dividends are always treated as the top slice of income. This means salary and other earnings are taxed first, and dividends stack on top. For a director drawing a small salary, most dividends therefore fall within the basic-rate band and attract the 10.75% ordinary rate, which is why a salary-plus-dividend structure remains tax efficient compared with taking all income as salary subject to National Insurance.

How much can a director take tax-free in 2026/27?

A director can typically take £13,070 tax-free in 2026/27 by combining a £12,570 salary with £500 of dividends. The salary uses the full personal allowance of £12,570, and the £500 dividend allowance shelters the first slice of dividends. A £12,570 salary is one of the most common tax efficient director pay starting points, though the company should check any employer's National Insurance due above the secondary threshold and whether the Employment Allowance covers it.

Where a director instead sets salary at the £6,708 Lower Earnings Limit to secure a qualifying year for the state pension without paying employee National Insurance, £5,862 of personal allowance remains unused. That unused allowance can cover £5,862 of dividends at 0%, and the £500 dividend allowance shelters a further £500, giving roughly £6,362 of tax-free dividends. The right salary choice depends on whether using the full personal allowance or minimising salary produces the better overall result, which is covered in detail in our guide to director salary and dividend strategy.

Worked example: salary plus dividends up to the basic-rate band

A director taking a £12,570 salary and £37,700 in dividends reaches the £50,270 higher-rate threshold and pays £3,999 in dividend tax for 2026/27. The salary uses the personal allowance in full, so it is free of income tax. Of the £37,700 in dividends, the first £500 is covered by the dividend allowance at 0%. The remaining £37,200 is taxed at the 10.75% ordinary rate, producing £3,999 of dividend tax.

That gives total gross income of £50,270 with a personal tax cost of just £3,999, an effective rate of under 8% across the whole package. If the same director pushed income higher, dividends above £50,270 would be taxed at 35.75%, so many owners deliberately cap dividends at the basic-rate ceiling and retain surplus profit in the company for a later year.

How should salary and dividends be balanced for 2026/27?

The optimal salary dividend limited company split balances corporation tax relief on salary against the lower personal tax rates on dividends. Salary is a deductible business expense that reduces corporation tax, currently between 19% and 25%, while dividends are paid from post-tax profit and are not deductible. A modest salary that maximises corporation tax relief, topped up with dividends taxed at 10.75%, usually produces the most tax efficient director pay for a typical owner-manager.

The correct mix depends on company profit, other personal income, pension contributions, and whether more than one family member holds shares. Because the dividend allowance is now only £500 and dividend rates rose in April 2026, pay structures that were optimal a few years ago may no longer be. Reviewing your position each tax year is the surest way to avoid overpaying.

Frequently Asked Questions

How much is the dividend allowance for 2026/27?

The dividend allowance for 2026/27 is £500. This means the first £500 of dividend income you receive in the tax year is taxed at 0%, whatever your income level. The allowance sits on top of your personal allowance, but it still uses part of your basic-rate band when determining the tax rate on further dividends.

What are the dividend tax rates in 2026/27?

Dividend tax rates in 2026/27 are 10.75% at the ordinary rate, 35.75% at the upper rate, and 39.35% at the additional rate. These rates apply to dividends above the £500 allowance. The rate you pay depends on your total income, because dividends are taxed as the top slice after salary and other earnings are counted.

How much can I pay myself tax-free from my limited company?

You can typically pay yourself around £13,070 tax-free from your limited company in 2026/27 by combining a £12,570 salary with £500 of dividends. The salary uses your personal allowance and the dividend allowance covers the £500. National Insurance and corporation tax still need checking, so professional advice ensures the structure genuinely minimises tax.

Are dividends better than salary for a company director?

Dividends are usually more tax efficient than salary for a company director because they carry no National Insurance and are taxed at lower rates, starting at 10.75% for 2026/27. However, salary is deductible for corporation tax and preserves state pension entitlement, so most directors take a small salary and top it up with dividends rather than choosing one alone.

How Blue Tick Can Help

Blue Tick Accountants builds a tailored director salary dividend strategy UK 2026 for company owners, calculating the exact salary and dividend split that minimises combined corporation tax and personal tax for your circumstances. As a specialist tax advisory practice, Blue Tick Accountants keeps your pay structure current with the £500 dividend allowance and the April 2026 rate changes. Head to our website and book a meeting now.

Conclusion

The dividend allowance is now just £500 for 2026/27, and with dividend rates having risen in April 2026, careful planning matters more than ever. A £12,570 salary plus £500 of dividends lets most directors extract £13,070 tax-free, with further dividends taxed at only 10.75% up to the basic-rate ceiling. Reviewing your salary and dividend mix each year is the single most effective way to keep your personal tax bill down.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners and directors across the UK structure tax efficient pay. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.

Related reading: Extracting Profits from Your Limited Company: A Director's Tax Toolkit.