The dividend allowance has been slashed repeatedly since it was introduced in 2016 — from £5,000 down to just £500 today. Here are the current rates and thresholds for 2026/27, plus how to reduce the tax you pay on dividend income.
Dividend Allowance 2026/27
| Detail | 2026/27 |
|---|---|
| Tax-free dividend allowance | £500 |
| Basic rate dividend tax | 8.75% |
| Higher rate dividend tax | 33.75% |
| Additional rate dividend tax | 39.35% |
The £500 allowance applies on top of your Personal Allowance of £12,570. If your only income is dividends, you can receive up to £13,070 tax-free (£12,570 + £500).
Dividend Allowance History
| Tax year | Dividend allowance | Change |
|---|---|---|
| 2026/27 | £500 | Unchanged |
| 2025/26 | £500 | Unchanged |
| 2024/25 | £500 | Halved from £1,000 |
| 2023/24 | £1,000 | Halved from £2,000 |
| 2022/23 | £2,000 | Unchanged |
| 2021/22 | £2,000 | Unchanged |
| 2020/21 | £2,000 | Unchanged |
| 2018/19 to 2019/20 | £2,000 | Cut from £5,000 |
| 2017/18 | £5,000 | Unchanged |
| 2016/17 | £5,000 | Introduced |
The cumulative effect is significant. An investor with £5,000 in dividend income paid zero dividend tax in 2016/17 but now pays tax on £4,500 of that income.
Dividend Tax Rates 2026/27
Dividend income above the £500 allowance is taxed at rates that depend on your total taxable income:
| Tax band | Income range | Dividend tax rate | Equivalent income tax rate |
|---|---|---|---|
| Basic rate | £12,571–£50,270 | 8.75% | 20% |
| Higher rate | £50,271–£125,140 | 33.75% | 40% |
| Additional rate | Over £125,140 | 39.35% | 45% |
Dividend rates are lower than income tax rates on employment income. This is why limited company directors often pay themselves through a combination of salary and dividends — the overall tax burden is lower.
Important: Dividends Are Taxed as the “Top Slice”
Dividend income sits on top of your other income when calculating tax. This means if your salary takes you to the edge of the basic rate band, even modest dividends could be taxed at the higher rate.
Example: You earn £49,000 salary. After your Personal Allowance, you have £36,430 of taxable salary — all within the basic rate band. You then receive £3,000 in dividends:
| Dividend portion | Tax rate | Tax due |
|---|---|---|
| First £500 | 0% (allowance) | £0 |
| Next £770 (fills basic rate band to £50,270) | 8.75% | £67.38 |
| Remaining £1,730 (higher rate band) | 33.75% | £583.88 |
| Total dividend tax | £651.26 |
How Dividends Are Taxed — Step by Step
- Add up all income — salary, pension, rental income, savings interest, dividends
- Deduct Personal Allowance (£12,570) from non-dividend income first
- Apply the dividend allowance (£500) to your dividend income
- Tax remaining dividends at the rate matching your overall tax band
The dividend allowance doesn’t reduce your total income or change your tax band — it just means £500 of dividends is charged at 0% instead of the normal rate.
Worked Examples
Example 1: Basic Rate Taxpayer with Shares
| Income | Amount |
|---|---|
| Salary | £35,000 |
| Dividends from shares | £2,000 |
| Total income | £37,000 |
| Calculation | Amount |
|---|---|
| Dividend allowance | -£500 |
| Taxable dividends | £1,500 |
| Tax at 8.75% (basic rate) | £131.25 |
Example 2: Company Director — Salary + Dividends
| Income | Amount |
|---|---|
| Director’s salary | £12,570 |
| Dividends from own company | £40,000 |
| Total income | £52,570 |
| Calculation | Amount |
|---|---|
| Personal Allowance used by salary | £12,570 |
| Dividend allowance | -£500 |
| Taxable dividends | £39,500 |
| Basic rate dividends (up to £50,270 total) | £37,200 at 8.75% = £3,255.00 |
| Higher rate dividends (£50,271–£52,570) | £2,300 at 33.75% = £776.25 |
| Total dividend tax | £4,031.25 |
Example 3: Retired Investor
| Income | Amount |
|---|---|
| State Pension | £11,973 |
| Private pension | £5,000 |
| Dividends | £3,000 |
| Total income | £19,973 |
| Calculation | Amount |
|---|---|
| Personal Allowance covers pension income | £12,570 |
| Taxable pension income | £4,403 |
| Dividend allowance | -£500 |
| Taxable dividends | £2,500 |
| Tax at 8.75% (basic rate) | £218.75 |
How to Reduce Dividend Tax
1. Use Your ISA Allowance First
Dividends received within an ISA are completely tax-free — no limit. If you’re investing outside an ISA and paying dividend tax, move investments into a Stocks and Shares ISA where possible. The 2026/27 ISA allowance is £20,000.
2. Use Your Pension
Dividends within a pension are also tax-free. Pension](/savings-investing/pension-tax-relief-guide/) contributions also attract tax relief, making them doubly efficient.
3. Split Investments Between Partners
If one partner is a non-taxpayer or basic-rate taxpayer, consider holding dividend-paying investments in their name. Each person gets their own £500 dividend allowance and potentially a lower tax rate.
4. Company Directors: Optimise Salary vs Dividends
The most tax-efficient strategy for limited company directors in 2026/27 is typically:
| Component | Amount | Why |
|---|---|---|
| Salary | £12,570 | Uses Personal Allowance, no income tax |
| Dividends | Up to £37,700 | Taxed at 8.75% (basic rate) |
| Total tax-efficient income | £50,270 | Stays within basic rate band |
Above £50,270, dividends are taxed at 33.75%. See the Dividend vs Salary Calculator for your specific situation.
5. Accumulation Funds Instead of Income Funds
Choose accumulation fund classes rather than income classes. Accumulation funds reinvest dividends automatically, deferring any tax event until you sell. This can be more tax-efficient outside an ISA.
Reporting Dividend Income to HMRC
| Dividend income level | How to report |
|---|---|
| Under £500 | No action needed — covered by allowance |
| £500–£10,000 | Contact HMRC to adjust your tax code, or file Self Assessment |
| Over £10,000 | Must file a Self Assessment tax return |
| Any amount in ISA/pension | No reporting required |
Dividend Tax Payment Deadlines 2026/27
| Event | Date |
|---|---|
| 2026/27 tax year starts | 6 April 2026 |
| 2026/27 tax year ends | 5 April 2027 |
| Self Assessment registration deadline | 5 October 2027 |
| Online Self Assessment filing deadline | 31 January 2028 |
| Tax payment deadline | 31 January 2028 |