Income tax on dividends for a director-shareholder in 2026/27 (ITA 2007 ss.8, 13A)
Anjali is a director and shareholder of Pellmar Ltd, a UK trading company. In the tax year 2026/27 she receives a salary of £30,570 and dividends of £30,000 from the company. She has no other income, is entitled to the standard personal allowance and lives in England. Assume the following for 2026/27: personal allowance £12,570; basic rate band £37,700; dividend allowance (dividend nil rate) £500; dividend ordinary rate 10.75%; dividend upper rate 35.75%. Dividends are treated as the top slice of income. Ignore National Insurance.
How much income tax is payable on Anjali's dividends?
Choose one answer to see the reasoning.
Worked answer
Correct answer C: £5,746.25
THE RULE TO REMEMBER
Dividends are taxed as the top slice of income; the £500 dividend nil rate still uses the band, then dividend ordinary and upper rates apply (ITA 2007 ss.8, 13A).
Income tax on dividends for a director-shareholder in 2026/27 (ITA 2007 ss.8, 13A)
The personal allowance is set against the salary first, leaving taxable non-savings income of £18,000 (£30,570 less £12,570). This uses £18,000 of the £37,700 basic rate band, leaving £19,700 for the dividends, which are taxed as the top slice. Under s.13A ITA 2007, the dividend allowance works as a nil rate: the first £500 of dividends that would otherwise be taxed at the ordinary rate is taxed at 0%. This £500 still uses up part of the basic rate band. So, of the £19,700 within the band, £500 is taxed at 0% and £19,200 at 10.75% (£2,064.00). The remaining £10,300 of dividends (£30,000 less £19,700) falls in the higher rate band and is taxed at 35.75% (£3,682.25). Total tax on the dividends is £5,746.25. These are the 2026/27 dividend rates set by s.8 ITA 2007.
Why A is wrong: This treats the £500 allowance as a deduction that does not use the basic rate band, so too much dividend income is taxed at 10.75%.
Why B is wrong: This taxes all dividends above the allowance at 10.75%, ignoring that £10,300 of them exceed the basic rate band.
Why D is wrong: This uses the pre-2026/27 dividend rates of 8.75% and 33.75% instead of the rates given.
Why E is wrong: This applies the non-savings rates of 20% and 40% to dividends instead of the dividend rates.
A little more practice done.
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