UK dividend allowance: cut from £2,000 to £500 — what it means for Arab directors

The UK dividend allowance is the amount of dividend income a UK taxpayer can receive tax-free each year. It started at £5,000 in 2016, dropped to £2,000 in 2018, halved to £1,000 for 2023/24, and halved again to £500 from 2024/25 onwards. For directors of UK companies who draw dividends as part of their remuneration, this has progressively eroded the strategy's tax efficiency.

What the numbers mean in practice. In 2022/23, if you drew £20,000 in dividends, £2,000 was tax-free. Since 2024/25, only £500 is tax-free. The rate applied to the taxable remainder has also risen: the Autumn Budget 2025 raised the basic dividend rate from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%, effective 6 April 2026 — so this is now a double squeeze, a smaller allowance taxed at a higher rate. For directors drawing £50,000+ in dividends at higher rates, the cumulative effect of the allowance cuts since 2018 plus the 2026 rate rise adds up to several thousand pounds annually.

Who this actually affects. This change matters if you are UK tax resident paying UK personal tax on dividends. If you are based in the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain, or Oman and are not UK tax resident, UK dividend tax does not automatically apply to dividends from your UK company. The dividend tax is a personal tax on the individual shareholder — not a company-level tax. Most Gulf-based Arab directors pay no UK personal tax on their dividends. Double tax treaties with Gulf states further reinforce this position.

When it becomes relevant for Gulf directors. If you spend 183+ days in the UK in a tax year, or meet certain other conditions under the UK Statutory Residence Test, you may become UK tax resident for that year. At that point, UK dividend tax applies to your worldwide dividend income. With the allowance now at £500 and rates higher since April 2026, the cost of even modest UK residency periods is higher than it was five years ago.

What else moved in the same direction. The Section 455 charge on Director's Loan Account balances outstanding 9 months after the company year end tracks the dividend upper rate — it rose from 33.75% to 35.75% for loans made on or after 6 April 2026, and remains the most expensive accidental tax most Arab directors face. The salary-plus-dividends structure (salary up to approximately £12,570 personal allowance, dividends thereafter) remains the standard efficient approach for UK tax residents — just less efficient than before the allowance cuts and the 2026 rate rise.