What Happens When You Go Over the Dividend Allowance?

What Is the Dividend Allowance?

The dividend allowance is the amount of dividend income you can receive each tax year without paying dividend tax. For the 2026/27 tax year, the allowance remains £500. It applies to your combined taxable dividends, regardless of how many companies or investments provide that income.

The dividend allowance is separate from your Personal Allowance, which remains £12,570 for 2026/27. If you have not used your full Personal Allowance, you may receive additional dividends without paying tax.

However, dividends covered by the £500 allowance still count towards your tax bands. This means they can affect the rate applicable to your remaining dividend income.

(Source: Annex A: rates and allowances, HMRC)

What Happens When You Exceed Your Dividend Allowance?

Exceeding your dividend allowance does not automatically make your entire dividend taxable. Instead, HMRC charges tax on dividends exceeding your available tax-free allowances. Your total taxable income determines the rate you pay.

Suppose you receive £5,000 in dividends during the 2026/27 tax year. Your salary has already used your entire Personal Allowance, leaving your £500 dividend allowance available.

If your remaining dividends fall within the basic-rate band, your dividend tax calculation would look like this:

You would pay £483.75 rather than paying tax on the entire £5,000. However, receiving the same dividend with a higher salary could result in a larger tax bill.

This is why directors should consider their total annual income before withdrawing additional dividends.

(Source: Income Tax rates and allowances for current and previous tax years)

Dividend Tax Rates for 2026/27

The dividend tax rates increased on 6 April 2026 for basic-rate and higher-rate taxpayers. The additional dividend tax rate remains unchanged. The following rates apply across the UK for the 2026/27 tax year.

Your dividend tax rate depends on your overall taxable income. For someone receiving the standard Personal Allowance, the basic-rate band normally covers total income up to £50,270.

Income above this level generally enters the higher-rate band, while the additional-rate threshold starts above £125,140. However, your Personal Allowance gradually reduces once your adjusted net income exceeds £100,000.

These calculations can become more complicated when dividends cross multiple tax bands. You might pay the basic dividend tax rate on one portion and the higher rate on another.

Does Your Salary Affect Dividend Tax?

Your salary directly affects how much dividend tax you pay. HMRC considers your taxable income when determining which tax bands apply. Dividends generally sit above your salary and other non-savings income in this calculation.

Suppose you receive a £12,570 annual salary and £40,000 in dividends during 2026/27. Assume you have no other income and qualify for the full Personal Allowance.

Your salary uses your Personal Allowance, leaving your dividend income subject to the following calculation.

Although most dividends fall within the basic-rate band, £2,300 attracts the higher dividend tax rate. The director would therefore pay £4,821.25 in dividend tax.

This example shows why directors should review their salaries and dividends together. An appropriate combination depends on other income, pension contributions and National Insurance considerations.

Do You Need to Tell HMRC?

Receiving dividends above your available allowances means you may need to report them to HMRC. However, exceeding the dividend allowance does not automatically mean you must register for Self Assessment.

Your reporting obligations depend on your dividend income and existing tax arrangements. According to HMRC’s dividend reporting guidance, individuals receiving taxable dividends of up to £10,000 may report them directly to HMRC.

If you receive employment income, HMRC may collect the outstanding tax through your PAYE tax code. However, dividend income exceeding £10,000 generally requires a Self Assessment tax return. Anyone already completing Self Assessment must include their dividend income.

For dividends received during the 2026/27 tax year, the standard deadlines are:

Different filing deadlines may apply when HMRC issues a late notice to file. Some taxpayers must also make payments on account, which can increase their January payment.

Directors should estimate their dividend tax liability throughout the year and reserve sufficient money for upcoming payments. 

Taking Dividends From Your Own Company

Your personal dividend allowance does not determine how much money your company can distribute. Before declaring dividends, directors must confirm that their company has sufficient distributable profits.

These generally include accumulated profits after tax, less accumulated losses and previous distributions. Having sufficient money in your business bank account does not necessarily mean you can withdraw that amount as dividends.

For example, your company might hold £30,000 in its bank account while owing substantial tax and other liabilities. Its available distributable profits could be considerably lower than its cash balance.

Before taking dividends, directors should complete the following checks:

• Check available profits: Confirm that the company has sufficient accumulated distributable profits after accounting for losses and previous dividends.
• Review financial records: Use up-to-date accounts to establish how much profit the company can legally distribute.
• Consider cash flow: Ensure the company retains enough money to cover Corporation Tax, operating expenses and upcoming liabilities.
• Document dividend decisions: Record the directors’ decision and prepare dividend vouchers showing the company name, shareholder, payment date and dividend amount.
• Assess personal tax liabilities: Consider how the proposed dividend affects your annual dividend allowance and applicable tax bands.

According to GOV.UK’s guidance on taking money from limited companies, directors must maintain appropriate documentation when declaring dividends.

Another important consideration involves Corporation Tax. Companies cannot deduct dividends as business expenses when calculating their Corporation Tax liabilities. Shareholders may therefore pay personal dividend tax on profits that have already attracted Corporation Tax.

Common Dividend Tax Mistakes

Even experienced company directors can make mistakes when calculating dividend tax or withdrawing company profits. These mistakes can result in unexpected tax liabilities, incorrect accounting records or additional HMRC reporting requirements.

Some of the most common dividend tax mistakes include:

1. Assuming the allowance applies separately to each company: The £500 dividend allowance covers your combined taxable dividend income, including dividends from other investments.
   
   
2. Taking dividends without sufficient profits: Withdrawing company funds without checking distributable profits can create accounting and legal problems. Invalid dividend payments may also create director’s loan implications.
   
   
3. Ignoring other sources of income: Employment income, rental profits and other taxable earnings can affect the tax bands available for dividends. Failing to consider them may result in an incorrect dividend tax calculation.
   
   
4. Failing to maintain dividend records: Directors should document dividend declarations and retain dividend vouchers. Missing records can make it difficult to demonstrate that payments qualify as dividends.
   
   
5. Not setting aside money for dividend tax: Directors sometimes withdraw dividends without considering their personal tax liabilities. This can create cash flow difficulties, particularly when HMRC requires payments on account.

These mistakes often arise when directors withdraw profits without reviewing their overall financial position. Regular tax planning and accurate financial records can help prevent unexpected liabilities.

How Can Directors Manage Dividend Tax?

Dividend planning should form part of your wider personal and business tax strategy. Reviewing your salary, dividends and other income throughout the year can help identify potential tax liabilities.

For company directors, choosing an appropriate salary also requires considering National Insurance contributions and employment obligations. Our payroll services can support these calculations and ensure accurate PAYE records.

Directors may also consider pension contributions and the timing of dividend payments when reviewing their overall tax position. However, any arrangement must reflect their circumstances and comply with the relevant tax rules.

Most importantly, dividend withdrawals should not compromise the company’s financial stability. Maintaining sufficient working capital and accurate accounting records remains essential.

Plan Your Dividends 

Exceeding your dividend allowance does not mean your entire dividend becomes taxable. However, the increased dividend tax rates for 2026/27 make careful planning particularly important for company directors.

Understanding how your salary, dividends and other income interact can help prevent unexpected tax liabilities. You should also confirm that your company has sufficient distributable profits before making dividend payments.

Not sure how much dividend you can take without creating an unexpected tax bill? Our team at Artifin Accountants can review your salary, dividends and overall tax position before your next dividend payment. Contact us for personalised guidance.