What Is the Dividend Allowance? UK Tax on Dividends 2025-26
The Dividend Allowance in 2025-26 is £500 — the first £500 of dividend income you receive each year is tax-free. Above that, dividends are taxed at special rates that sit below normal income tax rates but above zero.
Dividend Allowance History
The Dividend Allowance has been cut significantly over recent years:
| Tax Year | Dividend Allowance |
|---|---|
| 2017-18 to 2022-23 | £2,000 |
| 2023-24 | £1,000 |
| 2024-25 | £500 |
| 2025-26 | £500 |
The reduction from £2,000 to £500 over two years has significantly increased the tax burden on dividend income, particularly for company directors and investors with non-ISA portfolios.
Dividend Tax Rates 2025-26
Above the £500 allowance, dividends are taxed at the following rates (all lower than equivalent income tax rates, reflecting that corporation tax has already been paid by the company):
| Tax Band | Income Range | Dividend Tax Rate |
|---|---|---|
| Basic rate | Up to £50,270 | 8.75% |
| Higher rate | £50,271 to £125,140 | 33.75% |
| Additional rate | Above £125,140 | 39.35% |
Crucially, dividends do not attract National Insurance contributions — making them significantly cheaper than equivalent salary from an NI perspective.
How Dividends Sit on Top of Other Income
When calculating which tax rate applies to your dividends, HMRC treats dividends as the top slice of your income. This means your salary, pension, rental income and other earnings fill the tax bands first, and dividends are then added on top.
This is important: if your salary already pushes you into the higher rate band, all your dividends above £500 will be taxed at 33.75%, even if the dividend amounts themselves seem small.
Worked Example 1: £20,000 Salary + £10,000 Dividends
Total income: £30,000. This sits entirely within the basic rate band (£12,571–£50,270).
- Salary income tax: (£20,000 − £12,570) × 20% = £7,430 × 20% = £1,486
- Dividend allowance: first £500 of dividends — tax-free
- Taxable dividends: £10,000 − £500 = £9,500 at 8.75% = £831
- Total tax: £1,486 + £831 = £2,317. Take-home: £27,683
Worked Example 2: £50,000 Salary + £10,000 Dividends
The salary alone (£50,000) is just below the higher rate threshold (£50,270). But adding dividends pushes total income to £60,000.
- Salary income tax: (£50,000 − £12,570) × 20% = £37,430 × 20% = £7,486
- Dividend allowance: first £500 — tax-free
- Dividends pushing into higher rate band: £9,500 at 33.75% = £3,206
- Total tax: £7,486 + £3,206 = £10,692
This example shows why the band-stacking effect matters — a relatively modest dividend on top of a near-threshold salary is taxed at the higher rate.
Dividends vs Salary for Company Directors
Because dividends attract no NI, company directors often take a combination of a small salary (up to the NI threshold, £12,570 for 2025-26) and the rest as dividends. The optimal split depends on corporation tax already paid by the company, personal tax rates, and whether the director wants to accrue NI credits for the State Pension.
Dividends Inside an ISA: Zero Tax
Dividends received inside a Stocks and Shares ISA are completely exempt from dividend tax — the allowance does not even apply since there is simply no tax. If you hold shares in ISA wrappers, reinvested dividends and income are entirely tax-free, making ISAs particularly valuable for high-dividend portfolios.
Self Assessment Requirement
You must register for Self Assessment and file a tax return if your total dividend income exceeds £500 in a tax year, even as a basic rate taxpayer. HMRC uses Self Assessment to collect dividend tax since it cannot be deducted through PAYE.
Frequently Asked Questions
How much dividend can I take tax-free?
£500 in 2025-26. The first £500 of dividend income per tax year is completely tax-free regardless of your income level. Above £500, dividends are taxed at 8.75% (basic), 33.75% (higher), or 39.35% (additional).
Do I pay National Insurance on dividends?
No — dividends are not subject to NI contributions, which is one key reason directors often prefer dividends over salary. Salary attracts employee NI at 8% (or 2% above £50,270) and employer NI at 13.8%.
When do I need to file Self Assessment for dividends?
As soon as your dividend income exceeds £500 in a tax year, you must register for Self Assessment and file a return, even if you owe little or no additional tax.