How salary and dividends are taxed together in 2026/27

Salary normally uses the allowance and bands first

For a straightforward salary-and-dividend case, non-savings salary is taxed before dividend income. An unused Personal Allowance may cover some dividends. Above available allowance, dividends use the remaining tax-band capacity. Total income, including dividends, can reduce the Personal Allowance above £100,000 adjusted net income. Savings income and other sources require further consideration beyond this simplified example.

The £500 dividend allowance still uses a tax band

The 2026/27 dividend allowance is £500. It is a nil-rate amount, not a deduction that removes £500 from income when allocating tax bands. Above available allowances, dividend rates are 10.75%, 35.75% and 39.35%. The 2025/26 basic and higher rates were 8.75% and 33.75%; use the correct year rather than applying today's rates retrospectively. Dividends held within an ISA are normally exempt from dividend tax.

Worked example: £29,570 salary and £3,000 dividends

Assume 2026/27, the standard £12,570 Personal Allowance, no pension, student loan or other income. Salary uses the allowance first, leaving £17,000 salary taxable at 20%: £3,400 Income Tax on salary. The dividends remain in the basic-rate band. The first £500 of dividends is taxed at 0%, and £2,500 at 10.75% produces £268.75 dividend tax. Employee or director NI on salary is separate; dividends themselves do not attract employee NI.

Why this is not a salary-versus-dividend optimisation

A company normally pays dividends from distributable profits after Corporation Tax; they are not generally a deductible company expense. Salary and employer pension contributions have different company-level treatment. Employer NI, Employment Allowance eligibility, associated companies, other personal income and profit retained in the business all affect a real comparison. Our dividend calculator estimates personal tax and does not calculate Corporation Tax, distributable reserves or an optimal extraction strategy.

Pensions, NI and student loans need care

The dividend calculator's pension input assumes salary sacrifice, not a personal relief-at-source contribution. Select employee NI for twelve equal monthly salary payments or director NI for a full-year annual assessment. Student loan results are an annual combined-income estimate and may include qualifying unearned income; they are not just an additional amount on top of all repayments already withheld through PAYE. Reconcile with HMRC and your return to avoid counting payments twice.

Try and compare the correct tax years

Enter £29,570 salary and £3,000 dividends in the dividend calculator, choose 2026/27 and leave pensions and loans at zero to reproduce the £268.75 dividend-tax example. Compare 2025/26 to see the effect of the rate change with otherwise identical inputs. Check whether you must report dividends to HMRC; a calculator result does not file a tax return or establish the legality of a dividend payment.

Official sources

• GOV.UK: Tax on dividends and worked example
• GOV.UK: Income Tax rates and allowances
• HMRC: Adjusted net income
• GOV.UK: Taking money out of a limited company