Dividend tax is calculated differently from regular Income Tax — it uses its own set of rates, but the band thresholds you fall into are still determined by your total income, including your salary. Your salary or other income is taxed first and "uses up" the lower bands; your dividends then stack on top and are taxed according to whichever band they land in.
| Band | Rate |
|---|---|
| Dividend allowance | 0% (first £500) |
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
The £500 dividend allowance is available to everyone regardless of which Income Tax band they're in — it just means the first £500 of dividend income is always tax-free, with the remainder taxed at the rate matching your highest band.
The Personal Allowance (£12,570) is used first against the £30,000 salary, leaving £17,430 of salary taxed in the basic rate band. That uses £17,430 of the £37,700 basic rate band, leaving £20,270 of basic rate band space. The £500 dividend allowance covers the first £500 of dividends tax-free. The remaining £9,500 of dividends fits entirely within the remaining basic rate band space, taxed at 8.75% = £831.25. Total dividend tax: £831.
Unlike salary, dividends are not subject to National Insurance at all — neither employee nor employer NI applies. This is why many limited company directors pay themselves a small salary (often around the NI primary threshold to preserve State Pension qualifying years) and take the bulk of their income as dividends. However, successive governments have increased dividend tax rates and cut the dividend allowance significantly in recent years, narrowing this advantage compared to a decade ago.