The continued reduction in the Dividend Allowance has increased the tax burden for many directors and shareholders. At the same time, dividend tax rates will increase from April 2026. For this reason, you should consider how dividends interact with your other income and tax bands.
What is the Dividend Allowance?
The Dividend Allowance is the amount of dividend income you can receive tax-free each year. You only pay tax on dividends above this threshold. Over time, the allowance has reduced considerably. As a result, more individuals now pay tax on dividend income.
The allowance has changed as follows:
| Year | Dividend Allowance |
|---|---|
| 2026/27 | £500 |
| 2025/26 | £500 |
| 2024/25 | £500 |
| 2023/24 | £1,000 |
| 2022/23 | £2,000 |
| 2021/22 | £2,000 |
| 2020/21 | £2,000 |
| 2019/20 | £2,000 |
| 2018/19 | £2,000 |
| 2017/18 | £5,000 |
| 2016/17 | £5,000 |
Clearly, the current allowance sits at a much lower level than in previous years. However, dividends from shares held within an ISA (Individual Savings Account) remain completely tax-free.
How the Personal Allowance Works with Dividend Income
Before dividend tax applies, your Personal Allowance covers part of your income. In 2025/26, the Personal Allowance stands at £12,570.
If you receive only dividend income, you can use:
- £12,570 Personal Allowance
- £500 Dividend Allowance
This means you could receive up to £13,070 tax-free in 2025/26.
However, if you earn a salary or pension, that incomes uses your Personal Allowance first. Dividends then sit on top of your other income.
HMRC stacks income in the following order:
- Employment and pension income
- Savings income
- Dividend income
This order determines which tax band applies to your dividends.
Dividend Tax Rates for 2025/26
Your dividend tax rate depends on your overall Income Tax band. For 2025/26, the dividend tax rates are:
| Rate | Percentage |
|---|---|
| Basic Rate | 8.75% |
| Higher Rate | 33.75% |
| Additional Rate | 39.35% |
You work out your tax band by adding together all sources of income. This includes salary, rental income, savings and dividends.
Income Tax bands for 2025/26 are:
| Total Income | Rate |
|---|---|
| Up to £12,570 | Personal Allowance |
| £12,571 to £50,270 | Basic Rate |
| £50,271 to £125,140 | Higher Rate |
| Over £125,140 | Additional Rate |
In some cases, you may pay dividend tax at more than one rate. This happens when dividends push part of your income into a higher tax band.
Dividend Tax Rates for 2026/27
From April 2026, the Government will increase the Basic and Higher dividend tax rates by 2 percentage points.
The new rates for 2026/27 will be:
| Rate | Percentage |
|---|---|
| Basic Rate | 10.75% |
| Higher Rate | 35.75% |
| Additional Rate | 39.35% |
The dividend allowance will remain at £500. As a result, Basic and Higher Rate taxpayers will face a higher tax bill on dividend income from 2026/27 onwards.
Exceeding the Dividend Allowance
The £500 Dividend Allowance means you need a reasonable level of investments before tax applies.
For example: A portfolio yielding 5% would need to exceed £20,000 before you exceed the allowance.
However, dividends are not guaranteed. Companies decide whether to distribute profits. Therefore, your dividend income may vary from year to year. If you expect your dividend income to grow, you may wish to consider transferring investments into an ISA.
Reporting Dividend Income to HMRC
You must inform HMRC if you receive dividends above the £500 Dividend Allowance. If your dividends stay within £500, you do not need to take any action.
If your dividends fall between £500 and £10,000 in a tax year, you can either:
- Ask HMRC to adjust your tax code so they collect the tax through your salary or pension
- Complete a Self Assessment tax return
You must complete a Self Assessment tax return if your dividend income exceeds £10,000. If you do not normally file a tax return, you must register for Self Assessment by 5 October following the end of the relevant tax year.
Failure to report dividend income on time may lead to penalties and interest charges.
Dividends from Funds and Investment Trusts
Dividend tax does not only apply to individual shares. It also applies to equity funds and investment trusts that distribute dividend income. If you hold bond funds, the income usually counts as interest instead. In this case, savings income tax rules apply rather than dividend tax rules.
Dividends from shares or funds held inside a Stocks and Shares ISA remains tax-free.
Capital Gains Tax on Shares
Dividend tax applies only to income. When you sell shares at a profit, Capital Gains Tax may apply instead. In 2025/26, the Capital Gains Tax annual exemption stands at £3,000.
If your gains exceed this amount, the following rates apply:
- 18% for Basic Rate taxpayers
- 24% for Higher and Additional Rate taxpayers
HMRC calculates Capital Gains Tax after Income Tax. This order can sometimes reduce your overall tax exposure.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.