Dividend Tax Explained

If you own shares, run a limited company, or hold investments outside a tax wrapper, the dividends you receive may be taxable. Dividend tax works differently from tax on your salary, so it pays to understand the rules.

Dividend tax is charged on dividend income above the £500 annual dividend allowance. For the 2026/27 tax year the rates are 10.75% for basic-rate taxpayers and 35.75% for higher-rate taxpayers, with a higher rate again for additional-rate taxpayers.

In this insight, we explain the dividend allowance, the current rates, who pays dividend tax, and how ISAs can remove the charge altogether.

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Key Takeaways

• Everyone can receive £500 of dividends tax-free each year under the dividend allowance.
• Above the allowance, dividends are taxed at rates that depend on your income tax band.
• Dividend tax rates rose by 2 percentage points from April 2026, so basic and higher rates are now higher than they were.
• Dividends earned inside an ISA are free of dividend tax entirely.

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What is Dividend Tax?

A dividend is a share of a company's profits paid to its shareholders. If you own shares — whether in listed companies, funds, or your own limited company — you may receive dividends. Dividend tax is the income tax charged on that income once it exceeds your allowance.

It applies to dividends held outside a tax-free wrapper. Dividends inside an ISA or pension are not taxed.

The £500 Dividend Allowance

Everyone gets a dividend allowance of £500 for the 2026/27 tax year. You can receive up to £500 of dividend income without paying any dividend tax, regardless of your income tax band. Only dividends above £500 are taxed.

This allowance has been cut sharply in recent years (it was once several thousand pounds), so far more people now pay dividend tax than in the past.

Dividend Tax Rates for 2026/27

Dividend tax rates rose by 2 percentage points from April 2026. The rate you pay on dividends above your allowance depends on which income tax band the dividends fall into once added to your other income:

• Basic-rate taxpayers: 10.75%
• Higher-rate taxpayers: 35.75%
• Additional-rate taxpayers: a higher rate again (state cautiously — check GOV.UK for the exact current figure)

Dividends are treated as the top slice of your income, so if you're close to a band threshold, part of your dividends could be taxed at the lower rate and part at the higher rate.

Who Pays Dividend Tax?

You may face dividend tax if you:

• Hold shares or funds outside an ISA or pension and receive dividends over £500
• Are a company director or shareholder who takes profits as dividends
• Have inherited or built up an investment portfolio in a general account

Company owners in particular need to plan carefully, because dividends and salary are taxed differently and interact with National Insurance and corporation tax. If you run a business, our guide on whether you can invest money from a limited company covers some of the wider considerations.

How ISAs Remove Dividend Tax

The simplest way to avoid dividend tax on investments is to hold them inside an ISA. Dividends earned within a stocks and shares ISA are completely free of dividend tax, and you don't need to report them.

With a £20,000 annual ISA allowance, many people can shelter a substantial portfolio over time. Our guide to your ISA allowance explains how to make the most of it. Moving dividend-paying investments into an ISA — sometimes called "Bed and ISA" — is a common way to reduce a future dividend tax bill.

Reporting and Paying

How you settle any dividend tax depends on the amounts involved:

• Small amounts may be collected through an adjustment to your tax code.
• Larger amounts usually need to be reported through self assessment.
• If your only dividends are within the £500 allowance, there's normally nothing to report.

Keep records of the dividends you receive, as you'll need them if you file a tax return.

Frequently Asked Questions

Is the dividend allowance separate from the personal savings allowance?

Yes. The £500 dividend allowance covers dividends only. Savings interest has its own separate personal savings allowance.

Do dividends inside a pension get taxed?

No. Like ISAs, pensions shelter dividends from dividend tax while the money stays invested.

Are fund distributions treated as dividends?

Income from equity funds is generally taxed as dividends, while income from bond-based funds is usually taxed as interest. Check the nature of each fund.

Did dividend tax really go up?

Yes — rates rose by 2 percentage points from April 2026, which is why the basic and higher rates shown here are higher than in earlier years.

This is general information, not personal tax advice. For exact rates and your own position, check GOV.UK or speak to a qualified adviser.