Dividend tax explained

Dividend tax is the income tax you pay on dividends, the share of profit a company pays out to its shareholders. The first £500 of dividends each year is tax-free. Above that, dividends sit on top of your other income and are taxed at 10.75%, 35.75% or 39.35% in 2026/27, depending on which tax band they fall into.

What dividend tax is, and who pays it

A dividend is a payment a company makes to its shareholders out of its profit, after that profit has been through corporation tax. Dividend tax is the personal income tax you then pay on receiving it. It applies to dividends from shares you hold directly, in a listed company or in your own limited company, when they are held outside a tax wrapper.

Two groups pay it most. Investors who own shares or funds in an ordinary dealing account, and company owners who pay themselves through dividends rather than only a salary. Dividends held inside a stocks and shares ISA or a pension are free of dividend tax, so this only bites on holdings outside those wrappers.

The company itself does not deduct the dividend tax for you. You report and pay it yourself, usually through Self Assessment, the system for income that is not taxed at source.

The £500 dividend allowance

Everyone gets a dividend allowance, an amount of dividend income taxed at 0% each year. For 2026/27 it is £500. So the first £500 of dividends costs you nothing in tax, on top of your normal personal allowance (the £12,570 of income most people can have before any income tax at all).

There is a catch worth knowing. The £500 is taxed at 0%, but it still takes up room in your tax bands. It does not move your other dividends out of the way, it sits underneath them. So if your income is already close to the top of a band, the allowance can push the dividends above it into the next band up. It saves you the tax on £500, it does not hand you an extra £500 of headroom.

How dividends stack on top of your other income

Dividends are treated as the top slice of your income. That means your other income, salary, pension, rental profit and so on, is worked out first: it uses your personal allowance and fills the tax bands from the bottom. Your dividends then start where that income finished and stack on top.

This is why the same £3,000 of dividends can cost very different amounts for two people. For someone whose salary leaves room in the basic-rate band, the dividends are taxed at the 10.75% ordinary rate. For someone whose salary already reaches into the higher-rate band, those same dividends start in the higher band and are taxed at the 35.75% upper rate. It is your total income, not the dividends on their own, that sets the rate.

The rates and the bands

Once you are past the £500 allowance, the rate depends on which band each slice of dividend lands in. The bands below are in taxable-income terms, meaning income above your £12,570 personal allowance.

• Ordinary rate, 10.75%. Dividends that fall within the basic-rate band, up to £37,700 of taxable income.
• Upper rate, 35.75%. Dividends that fall within the higher-rate band, from £37,700 up to £125,140.
• Additional rate, 39.35%. Dividends above £125,140 of taxable income.

The ordinary and upper rates both rose on 6 April 2026, from 8.75% and 33.75%. The additional rate is unchanged at 39.35%. One more thing to note: the personal allowance starts to shrink once your total income goes over £100,000, falling by £1 for every £2 above that, which can raise the effective rate on income in that range. Dividends use the UK rates and bands everywhere in the country, so there is no separate Scottish dividend rate.

A worked example

Say you have £29,570 of other income, a salary, and £3,000 of dividends on top. Your £12,570 personal allowance is used up by the salary, leaving £17,000 of taxable salary inside the basic-rate band. The dividends then stack on top of that:

• The first £500 of dividends is covered by the allowance, taxed at 0%.
• The remaining £2,500 sits inside the basic-rate band, taxed at the 10.75% ordinary rate, which is £268.75.

So the dividend tax on £3,000 here is £268.75. To run your own figures, with a different salary or dividend amount, use the dividend tax calculator and it will split the dividends across the bands for you.

Salary versus dividends for company owners

If you run your own limited company, you can pay yourself with a salary, a dividend, or a mix. The two are taxed in different ways, which is why the mix matters. A salary is pay for work and counts as earnings, so it is subject to income tax and National Insurance. A dividend is a share of profit, so it carries dividend tax but no National Insurance at all.

That makes a common pattern a modest salary topped up with dividends. The salary side is ordinary employment income, so for how that part is taxed see how take-home pay works. Remember that dividends come out of profit the company has already paid corporation tax on, so the company-level tax is part of the picture too. The best mix depends on your numbers and changes with the rates, so it is worth checking with an accountant rather than copying a rule of thumb. For the full picture, see our guide to salary vs dividends.

Dividends are unrelated to VAT, the tax on what a business sells. If you are weighing up how a company is taxed overall, it helps to know how VAT works as well.

Common questions

What counts as a dividend?

A dividend is a share of a company's profit paid out to its shareholders, after the company has paid corporation tax on that profit. If you own shares, whether in a listed company or your own limited company, the money paid to you as a shareholder is a dividend. It is different from a salary, which is pay for work and is taxed as earnings.

Does the £500 allowance mean my first £500 is always free of band space?

Not quite. The £500 is taxed at 0%, so you pay nothing on it, but it still sits inside your tax bands and uses up that space. So if your income is near the top of the basic-rate band, the £500 can nudge the dividends above it into the higher band. It saves you the tax on £500, it does not give you £500 of extra room.

Why are my dividends taxed at a higher rate than I expected?

Dividends are the top slice of your income, so they are taxed after your salary or pension has already filled the lower bands. If your other income reaches into the higher-rate band, your dividends start where that income left off, which can be the higher band. It is your total income, not the dividends alone, that decides the rate.

Are dividends from an ISA or pension taxed?

No. Dividends from shares or funds held inside a stocks and shares ISA or a pension are free of dividend tax, and they do not use up your £500 dividend allowance either. The allowance and the rates here only apply to dividends held outside those wrappers, in an ordinary share-dealing account or your own company.

What changed for dividends in April 2026?

From 6 April 2026 the ordinary rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. The additional rate stayed at 39.35% and the dividend allowance stayed at £500. So basic and higher-rate shareholders pay more on the same dividends than they did in 2025/26, while the top rate is unchanged.

Do I need to tell HMRC about my dividends?

If your dividends are over £500 in the year you usually report them through Self Assessment, the system for telling HMRC about income that is not taxed at source. Dividends between £1 and £10,000 can sometimes be handled by adjusting your tax code instead, by contacting HMRC. Above £10,000 you need to register for Self Assessment if you are not already in it.

Are these dividend figures exact?

They are an estimate to help you plan, not financial or tax advice. The rates and the £500 allowance are correct for 2026/27, but your actual bill depends on all your income for the year. Confirm your position with HMRC or a qualified accountant.

About this article

Written by the calcd team. We build UK money calculators and explain the numbers behind them in plain English. We checked the rates, the £500 allowance and the top-slice method against gov.uk and HMRC guidance for the 2026/27 tax year, including the technical note confirming the ordinary and upper rates rose on 6 April 2026. The figures here are an estimate to help you plan, not financial or tax advice. Your actual bill depends on your total income for the year, so confirm it with HMRC or a qualified accountant. Last updated June 2026.