Dividend tax: the dividend allowance and rates

Dividend tax is the income tax you pay on money a company pays you for holding its shares. Everyone gets a dividend allowance: the first £500 of dividend income each tax year is taxed at 0%, so no tax is due on it¹. Anything above £500 is taxed at special dividend rates, which for the 2026 to 2027 tax year are 10.75% if the dividends fall in your basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band².

Two things catch people out. First, the £500 allowance is not extra tax-free income on top of your Personal Allowance: dividends within it still count towards your income and use up part of your basic or higher rate band³. Second, even if your employment income is taxed using Scotland's six band structure, your dividends still use the standard UK tax bands². This page explains the allowance, the rates, how your income tax band decides which rate applies, how Scottish taxpayers are affected, and how and when you tell HMRC about dividend income.

What dividend tax is and when it applies

Dividend tax applies when you receive income from shares, typically because you own shares directly, hold funds that pay dividends, or you are a company director taking money out of your own company. It is part of income tax, administered by HMRC, but dividends have their own rates, which are lower than the rates on wages, pensions or savings interest⁵. The reason the rates are lower is historical: before April 2016 dividends came with a notional tax credit, equal to one ninth of the dividend, which was treated as covering basic rate tax. That system was abolished and replaced with the current allowance-plus-rates structure³.

The charge applies to your total dividend income for a tax year, added on top of your other income. Dividends are treated as the top slice of your income: your Personal Allowance and the bands for your wages, pension or trading income are worked out first, and dividends then fill whatever is left of each band. The page on in what order savings and dividend income are taxed covers this stacking in detail.

There are some less obvious cases. If you are in a Share Incentive Plan at work and use dividends to buy more shares (called dividend shares), taking those shares out of the plan during the first three years means the dividends used to buy them are taxed as a dividend in the year of withdrawal⁴. And if you have only a small amount of tax to pay on dividends, HMRC may deal with it without asking you to complete a full tax return, by sending you a Simple Assessment letter instead⁶.

If you are unsure whether your dividends create a tax bill, HMRC provides an online tool that checks whether you have to pay tax on dividend income or savings interest and shows how the tax is worked out⁷. It has limits: you cannot use it if you file a Self Assessment tax return, get any foreign income, or receive Marriage Allowance or Blind Person's Allowance, and it assumes tax code 1257L⁷.

The dividend allowance: the first £500 is tax-free

The dividend allowance is the amount of dividend income each tax year that is taxed at 0%. For the 2026 to 2027 tax year it is £500¹. If your total dividends for the year are £500 or less, you pay no tax on them at all.

Strictly speaking, it is not an allowance in the way the Personal Allowance is. HMRC's own manual describes it as "a 0% tax rate inserted into ITA07/S8, as S8 (A1), properly called the 'dividend nil rate'"³. The practical effect is the same as an allowance for most people: no tax on the first £500. But the mechanism matters for how the allowance interacts with your tax bands, which the next sections cover.

The £500 applies to your dividend income as a whole, not per company or per account. Dividends from ten different holdings are added together, and the 0% rate covers only the first £500 of the total. Anything above that is taxed at the dividend rate for whichever band the dividends fall into².

For context, the allowance sits alongside other tax-free amounts that apply to different kinds of income. The Personal Savings Allowance lets higher rate taxpayers earn £500 of interest tax free, while additional rate taxpayers get £0⁸. Capital gains on investments are separate again, with £3,000 of profit each tax year before Capital Gains Tax applies⁹. The guide to how savings interest fits into your income tax covers the savings side.

Dividend tax rates for 2026 to 2027: 10.75%, 35.75% and 39.35%

For the 2026 to 2027 tax year, dividend income above the £500 allowance is taxed at three rates, depending on which income tax band the dividends fall into²:

The two percentage point rise at the ordinary and upper rates took effect from 6 April 2026, following the 2025 Autumn Budget¹¹. The additional rate was left as it was: the Budget documents state "The additional rate will remain the same at 39.35%"¹². The official policy statement confirms the upper rate "will be increased by 2 percentage points to 35.75%" from 6 April 2026¹¹.

This is the second rise in five years. From the 2022 to 2023 tax year, dividend tax rates increased by 1.25 percentage points from their 2021 to 2022 level¹³, a measure the government described at the time as increasing "the rates of Income Tax applicable to dividend income by 1.25%"¹⁴. So a basic rate taxpayer's dividend rate has gone from 7.5% in 2021 to 8.75% in 2022 and to 10.75% now, entirely through rate rises rather than any change to how dividends are taxed.

How your income tax band sets the rate you pay

Which of the three rates applies to a given dividend depends on where it sits in your income for the year. Dividends are stacked on top of your other income, so your wages, pension or self-employed profits fill your bands first, and dividends take what is left.

For 2026 to 2027, the higher rate band for taxable income runs from £37,701 to £125,140, with the additional rate applying above £125,140². So if you have £30,000 of salary and £20,000 of dividends, your Personal Allowance covers the first £12,570 of salary, the rest of the salary fills the basic rate band, and the dividends are split: some taxed at 10.75% and the portion above the basic rate band limit at 35.75%. The pages on income tax bands and rates and on losing your Personal Allowance above £100,000 explain how the underlying bands work.

Scottish taxpayers need to be careful here, because the answer is different from what they might expect. The Scottish Parliament sets its own rates and bands for non-savings, non-dividend income such as employment income¹⁵. For 2026 to 2027 the Scottish higher rate is 42%, applying to income between £43,663 and £75,000¹⁶, and Scottish taxpayers on earnings of £50,000 pay 42% higher rate tax on income between £43,663 and £50,000¹⁷. In 2025 to 2026 the Scottish basic rate band ran from £15,398 to £27,491 at 20%¹⁸.

But dividends are taxed at the same rates in Scotland as everywhere else. HMRC's guidance is explicit: "You pay the same tax as the rest of the UK on [your dividends]"¹⁹. The same applies to savings interest¹⁹. What differs is where the band boundaries sit, because a Scottish taxpayer's wages are taxed on Scottish bands, so the point at which dividends start falling into the higher rate can arrive at a different total income than for a taxpayer in England, Wales or Northern Ireland. In 2024 to 2025, 34.4% of Scottish taxpayers paid at the basic rate as their highest marginal rate, 17.0% at the higher rate, 3.8% at the advanced rate and 1.4% at the additional or top rate²⁰.

The allowance still uses up your basic or higher rate band

This is the part of the dividend allowance most often misunderstood. Because the allowance is a 0% rate rather than a deduction, the first £500 of dividends still counts as income when your bands are worked out³. It fills part of your basic rate band (or higher rate band, if your other income has already used up the basic band), even though no tax is charged on it.

The consequence is that the £500 does not extend how far your other income can go before hitting the higher rate. If your salary is £500 below the higher rate threshold, £500 of dividends covered by the allowance takes you exactly to that threshold, and any further dividends are taxed at 35.75% rather than 10.75%.

The practical effect is that the £500 allowance is a 0% rate, not an amount taken off the top of your income. Dividends above the allowance are taxed at 10.75% if your income falls in the basic rate band (income £12,571 to £50,270), 35.75% in the higher rate band (income £50,271 to £125,140) and 39.35% above that². Because the dividends themselves help determine which band you are in, large dividend incomes can push part of them into a higher rate, and the same standard UK bands apply even if your employment income is taxed using Scotland's six band structure².

Two other points about allowances are worth knowing. If your income exceeds £100,000, your Personal Allowance is reduced, and you do not get a Personal Allowance at all if you earn over £125,140⁸, which pushes more of your income, including dividends, into the higher bands. And the Personal Savings Allowance, which shelters savings interest, is separate from the dividend allowance: the £500 dividend allowance applies to dividends only, and the Personal Savings Allowance of £500 for higher rate taxpayers or £0 for additional rate taxpayers applies to interest only⁸.

Dividends in ISAs and pensions are sheltered

Dividends on shares held inside an ISA or a pension are not subject to dividend tax at all. Within these wrappers, dividend income is untaxed, even if it exceeds the annual dividend allowance of £500¹. The returns earned in an ISA are tax free²¹, and ISAs are tax exempt accounts under which any income received in the form of interest or dividends is exempt from income tax²².

The same shelter applies to pensions. Dividends received within a Self-Invested Personal Pension (often called a SIPP) or by registered pension schemes are also outside the charge. Tax is not avoided altogether in a pension's case: it is deferred, because withdrawals from a pension are taxed as income when you take them. The guide to pensions covers how withdrawals are taxed.

The ISA route has a hard limit on how much you can put in. You can invest up to £20,000 each tax year in a stocks and shares ISA, and any dividends and returns on shares and bonds held in an ISA are tax free²³. Recent legislation has tightened one corner of the ISA rules: no repayment of tax or amounts representing tax may be made to an account investor receiving interest on cash held in a stocks and shares or Innovative Finance ISA²⁴. That affects reclaiming tax on cash interest inside those ISAs, not the tax-free treatment of dividends.

For a higher rate or additional rate taxpayer with a large portfolio, the difference between holding shares in an ISA and holding them in a general investment account can be substantial, because outside a wrapper every pound of dividends above £500 is taxed at 35.75% or 39.35%². The allowance itself is the same £500 whatever band you are in: unlike the Personal Savings Allowance, it is not reduced to £0 for additional rate taxpayers⁸.

Company directors paying themselves in dividends

Many company directors take part of their income as dividends rather than salary, because dividend rates are lower than the rates on employment income and dividends do not attract National Insurance contributions. The tax rules allow this: dividends above the allowance are simply taxed at the dividend rates², and the guide to how self-employed income is taxed covers the wider picture for people working for themselves.

What HMRC does not allow are arrangements that push dividend income onto people who pay less tax. HMRC has published guidance on a scheme known as Spotlight 62, used to fund school fees, in which arrangements "seek to avoid tax by allowing the directors, who are also the main shareholders (the owners) of a compa"²⁵ to divert dividend income to their minor children, through a new class of shares, a purchaser (usually a grandparent or sibling), and a trust for the children²⁵. HMRC names these as avoidance schemes, and using one carries the risk of the tax being recovered later with interest and penalties. The page on undeclared income and how far back HMRC can go covers what happens when tax that should have been paid is not.

Directors should also be aware that dividends must legally come out of company profits, and that the combination of salary and dividends affects things beyond income tax, including entitlements that depend on earnings. Neither point changes the dividend tax rules themselves, but both are reasons the "pay yourself in dividends" question is rarely only a tax question.

How to tell HMRC about dividend income

How you report dividends depends on how much tax is due and whether you already file a return. HMRC's guidance is to check if you need to tell it about income that is not covered by your tax code⁵.

If the tax can be collected through your tax code, HMRC may change your code so the tax is taken through PAYE across the following year. This is the usual route for modest amounts. The pages on tax codes and on how to check your tax code explain how to see whether a dividend adjustment has been included.

If the amount is larger, or your affairs are more complex, dividends are reported through Self Assessment. The deadlines matter:

1. Register by 5 October following the tax year in which you received the income, if you do not usually send a tax return⁴. The same 5 October deadline applies to other income that triggers Self Assessment for the first time.
2. File the return. If you send it by post, the deadline is 31 October, and you will be fined if you miss it²⁶. Filing online gives you longer.
3. Pay by 31 January. You need to pay your Self Assessment tax bill by midnight on 31 January following the tax year you are paying for²⁷. The guide to payments on account covers the advance payments that may follow.

There is a middle route that does not require a full return. HMRC may send you a Simple Assessment letter when there is tax to pay on interest on savings or dividends⁶. A Simple Assessment is a calculation HMRC does itself, based on information it already holds, such as figures reported by banks and platforms. HMRC has urged customers not to ignore these letters: the tax shown is a real liability, and ignoring one leads to penalties and interest. The page on Simple Assessment explains how it works and what to check. Separately, if your bank or building society tells HMRC you have more than £10,000 in savings interest, HMRC will send you a notice to file a tax return²⁸.

Special cases have their own rules. Dividend shares taken out of a Share Incentive Plan are reported by including the amount of the dividend used to buy the shares in box 4 in the dividend boxes on page TR 3 of your tax return for the year the shares cease being part of the plan²⁹. People moving abroad need to tell HMRC they are moving, to make sure they pay the right amount of tax on UK income including dividends³⁰.

How the allowance has shrunk from £5,000 to £500

The dividend allowance has been cut repeatedly since it was introduced. When the current system replaced the dividend tax credit from 6 April 2016, the allowance was £5,000: the 2015 policy statement announced "a new Dividend Allowance in the form of a 0% tax rate on the first £5,000 of dividend income per year"³¹. It applied to the first £5,000 of an individual's income for the 2016-17 and 2017-18 tax years³.

From 2018-19 and 2019-20 the allowance applied to the first £2,000³. It then fell to £1,000 in 2023/24 and to £500 in 2024/25³³. The official statistics record the policy decisions "to decrease the dividend allowance from £2,000 to £500 and the capital gains annual exempt amount" to £3,000, taken together as a package³⁴.

The combined effect of the allowance cuts and the rate rises is that dividend tax now bites much earlier and harder than it did a decade ago. In the 2022 to 2023 tax year, total income from dividends fell by 1.5%, from £71.6 billion in the previous year to £70.5 billion¹³, so the amounts being taxed have not grown, but the proportion of them that is taxable has. A basic rate taxpayer with £3,000 of dividends paid no tax on them under the original £5,000 allowance; today £2,500 of that is taxed at 10.75%².

Where dividend tax rules stop

Dividend tax does not apply to everything an investor receives. The main boundaries are:

• ISAs and pensions: dividends inside these wrappers are untaxed, whatever the amount, and do not use up the dividend allowance. The £20,000 annual ISA subscription limit is the constraint, not the dividend allowance²³.
• The first £500 of dividends: taxed at 0% wherever they come from¹.
• Capital gains: selling shares at a profit is Capital Gains Tax, a separate tax with its own £3,000 annual exempt amount⁹. The guide to Capital Gains Tax covers it.
• Wages and pension income: taxed at the normal income tax rates, not the dividend rates⁵.

Two cautions finish the picture. First, the rates and allowance shown here are for the 2026 to 2027 tax year, and they have changed three times since 2022¹¹, so figures read in an older article or letter may be out of date. Second, if dividends have gone unreported in past years, HMRC can go back and recover the tax, with penalties; the page on undeclared income sets out how far back it can reach and how to put it right. For free, impartial help with tax questions, HMRC's own guidance and the HMRC helpline are the starting points, and the guide to complaining about HMRC covers what to do if something goes wrong.