damaged wall

[white poodle]

do i need to plaster the whole wall after removing dado rail or can i plaster where the dado rail was

[buildersmate]

You can do what you like, but the issue is whether it will show. Eyes are very able to detect very small defects in a 'flat' vertical wall, especially if painted (wallpaper tends to mast - embossed wallpaper can hide all manners of surface defects).
If a tradesman is doing this for you, ask this advice - he will not want to do leave you looking at a bodged job and so will cut back what is necessary. If you are doing this yourself, try it. You can always knock it back out again.