Dividend Allowance | Business At

Dividend allowance is a tax-free amount that allows UK shareholders to receive up to £500 in dividends each year without paying income tax. This article provides the latest updates on dividend allowance and tax rates for 2026-27, helping business owners plan effectively and comply with HMRC regulations.

Understanding these changes can optimize your tax strategy and protect your profits.

What is the Dividend Allowance?

The dividend allowance is £500 for both the 2025-26 and 2026-27 tax years. This means the first £500 of dividend income you receive is tax-free.

Any dividends above this amount are subject to tax based on your income band, making it a crucial element for tax planning.

Current and Future Dividend Tax Rates

For the 2025-26 tax year, the dividend ordinary rate is 8.75%, the upper rate is 33.75%, and the additional rate is 39.35%.

In 2026-27, the ordinary rate increases to 10.75% and the upper rate to 35.75%, while the additional rate remains at 39.35%. These changes impact tax liabilities on dividends above the allowance.

Personal Allowance and Income Limits

The personal allowance for 2025-26 is £12,570, with an income limit of £100,000. Exceeding this limit reduces your personal allowance.

Tax bands include basic rate up to £37,700 at 20%, higher rate £37,701 to £125,140 at 40%, and additional rate above £125,141 at 45%. Dividend income interacts with these bands.

Implications of Foreign Income Claims

Making a foreign income claim can result in loss of personal allowance, blind person's allowance, and other reliefs for that tax year.

This forfeiture includes capital gains tax annual exempt amount and restrictions on claiming foreign losses, increasing overall tax liability for business owners with international income.

Planning for Tax Changes from April 2026

Illustrative tax changes based on the OBR's March 2025 economic forecasts will apply from April 2026. Ready reckoners are available to estimate effects.

Business owners should review dividend strategies to adapt to increasing rates and allowance limits, ensuring compliance and tax efficiency.

Ready to Optimize Your Dividend Strategy?

Sources:

• Income Tax rates and allowances for current and previous tax years - GOV.UK
• Annex A: rates and allowances - GOV.UK
• Draft legislation (accessible version) - GOV.UK
• RFIG43000 - FIG regime: Effects of claim - HMRC internal manual - GOV.UK
• Direct effects of illustrative tax changes bulletin (June 2025) - GOV.UK