How dividend tax works
A plain-English guide to dividend tax: the £500 allowance, the new 2026/27 rates, and how dividends stack on top of your other income.
What are dividends?
Dividends are payments a company makes to its shareholders out of profits. You might receive them from shares and funds you hold outside an ISA — or, if you run your own limited company, as the main way you pay yourself alongside a salary.
Dividends are taxed differently from salary: they have their own allowance, their own rates, and they are always treated as the top slice of your income.
The £500 dividend allowance
The first £500 of dividends each year is tax-free. The allowance has shrunk dramatically — it was £5,000 in 2017/18, £2,000 until 2022/23 and £1,000 in 2023/24 — so even modest portfolios outside an ISA can now generate a tax bill.
The 2026/27 rates — higher than before
Budget 2025 raised the two lower dividend rates by 2 percentage points from 6 April 2026, “reflecting that dividends don't carry National Insurance”:
| Band | 2025/26 | 2026/27 |
|---|---|---|
| Dividend allowance | £500 at 0% | £500 at 0% |
| Basic rate | 8.75% | 10.75% |
| Higher rate | 33.75% | 35.75% |
| Additional rate | 39.35% | 39.35% |
Dividends sit on top of your other income
To work out the rate, add your dividends on top of your salary, pension or self-employed profit. Your other income fills the bands first; the dividends take whatever band space is left. A £40,000 salary plus £20,000 of dividends means the dividends start where the salary stopped.
Worked example: director on £12,570 salary + £50,000 dividends
| Salary (uses the personal allowance, no income tax) | £12,570 |
| Dividends | £50,000 |
| Dividend allowance | − £500 at 0% |
| Basic-rate band: 10.75% × £37,200 | £3,999 |
| Higher-rate band: 35.75% × £12,300 | £4,397.25 |
| Total dividend tax | £8,396.25 |
| Take-home from £62,570 | £54,173.75 |
Under the old 8.75%/33.75% rates the same director would have paid £7,406 — the 2026/27 rise costs them about £990 a year.
How dividend tax is paid
There is no PAYE on dividends. If your dividends are over £500 you generally tell HMRC via Self Assessment (register by 5 October after the tax year if you don't already file). For dividend tax under £3,000, HMRC can instead collect it through your tax code if you ask.
Frequently asked questions
What are the dividend tax rates for 2026/27?
From 6 April 2026: 10.75% in the basic-rate band, 35.75% in the higher-rate band and 39.35% in the additional-rate band. The first two rose by 2 percentage points at Budget 2025 (from 8.75% and 33.75%); the additional rate is unchanged.
What is the dividend allowance?
You can receive £500 of dividends tax-free each year. Note it still uses up part of your tax band — it sets the rate on your remaining dividends, it just charges 0% on the first £500.
Are dividends taxed before I receive them?
No. Companies pay dividends gross — there is no withholding tax in the UK. If you owe dividend tax you pay it through Self Assessment, or HMRC can collect smaller amounts through your tax code.
Do I pay National Insurance on dividends?
No — dividends are free of National Insurance. That is one reason company directors often take a small salary plus dividends, although the 2026/27 rate rises have narrowed the advantage.
Are dividends in an ISA or pension taxed?
No. Dividends from investments held inside a Stocks & Shares ISA or a pension are completely tax-free, don’t use the £500 allowance and don’t need to be reported.
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