What Can You Take Tax-Free and at the Lower Rate of Tax?

It is advisable to consider whether you have fully maximised the amount you can withdraw from your company tax-free or at the basic rate of dividend tax. Assuming your company generates sufficient profits, and you have no other sources of income, using the recommended low salary/higher dividend strategy, the tax-free withdrawal comprises £12,570 via salary (utilising the personal allowance) plus £500 via the dividend allowance. This yields a total of £13,070 tax-free. You can then receive an additional £37,200 of dividends at the basic rate of 8.75% (within the £37,700 basic rate band for taxable income), before the higher rate of 33.75% applies.

• If you pay yourself a salary of £12,570 per year from your company, you could take a total of £37,700 in dividends during the year: £500 tax-free (dividend allowance) plus £37,200 taxed at 8.75%.

The salary/dividend combination outlined above results in an estimated personal tax liability of £3,255 (calculated as £37,200 × 8.75%), due by 31 January 2027, excluding payments on account, additional income, or expenses. Note that this salary level incurs no employee National Insurance contributions and qualifies for a state pension year, while providing corporation tax relief to the company. If you have other income, such as rental or employment income, this will reduce the space available for dividends before higher rate tax applies, as dividends are stacked as the top slice of income.

When Do You Need to Make Dividend Payments By?

Final dividends must be declared and paid (or made available) on or before 5 April 2026 to qualify for the 2025/26 tax year calculations and to utilise the current allowances. Failure to do so may result in those dividends falling into the next tax year, potentially exposing them to higher rates (e.g., basic rate dividend tax rises to 10.75% from 6 April 2026 per the Autumn Budget 2025).

What Should You Take?

In most scenarios, it is prudent to withdraw funds from the company at the lowest available tax rates rather than allowing reserves to accumulate, as personal circumstances and tax rules may change. However, the following factors may reduce the effective tax-free allowance (£13,070) or the basic rate dividend band (£37,200):

• Other income sources, which use up personal allowance and basic rate band space.
• Taper of personal allowance if total income exceeds £100,000.
• Company must have sufficient distributable reserves post-corporation tax before declaring dividends.

With the higher rate increasing to 35.75% from 6th April 2026, it may be prudent to consider if you intend to exceed the basic rate within the next year. Though the tax liability will be due sooner, you would be paying a lower rate of 33.75% on dividends taken above the lower rate threshold (£50,270 of total income including the salary) if paid before 5th April 2026.

For Scottish taxpayers, you pay Scottish Income Tax on non-savings, non-dividend income (such as salary), while dividend taxation remains UK-wide. For the 2025/26 tax year (ending 5 April 2026), assuming a £12,570 salary (covered by the personal allowance, no employee NI, state pension qualifying year, and corporation tax deductible) with no other income, the strategy allows Scottish taxpayers £500 of dividends tax-free under the UK dividend allowance, plus £37,200 at the UK basic dividend rate of 8.75% (within the £37,700 UK basic rate band for taxable income up to £50,270), increasing to 10.75% from 6th April 2026.

Is there any further reading?

We have a few blogs to provide further reading on tax allowances, dividends and other tax rates:

• What are dividends and how are they taxed?
• UK dividend tax rates and thresholds for 2025/26
• NMW and NLW rates increase from 1st April 2026
• New Child Benefit tax rates from 6th April 2026

What additional help is there?

Prior to the financial year end, you might be considering pensions and investments to be tax efficient personally, or through your company.  Whilst we are not financial advisors and therefore, cannot advise on pensions and investments, we do partner with a very trusted firm of financial advisors. Please let your accountant know and they will send a referral over.

If in doubt, please speak with your accountant.

Please let your dedicated accountant know if you need to discuss this in further detail or book a call. If you would like specific advice on how much you could take in dividends, please ensure all bookkeeping is up to date and you have access to any other income you might be earning in advance of the call. Please ensure this is in advance

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