Dividends above the allowance are taxed at 8.75% in the basic-rate band, 33.75% in the higher-rate band, and 39.35% in the additional-rate band. The allowance applies regardless of total income — even additional-rate taxpayers get the first £500 of dividends tax-free. For owner-managed companies, the shrinking allowance has made the salary/dividend optimisation less generous than it was 5 years ago.