Dividend Tax Explained
Tax on income from shares in a company. The first £500 in dividends is tax-free in 2025-26. Above that, rates range from 8.75% to 39.35% depending on your Income Tax band.
What is dividend tax?
Dividends are payments companies make to their shareholders from after-tax profits. Because the company has already paid Corporation Tax on those profits (currently 25%), dividend tax rates are lower than standard Income Tax rates.
For 2025-26, the dividend allowance is £500. This means the first £500 of dividend income is tax-free regardless of your tax band. The allowance was £2,000 until April 2023 and £1,000 in 2023-24.
How it works
Dividends sit on top of your other income when calculating which tax band applies. The rates for 2025-26:
| Band | Dividend rate |
|---|---|
| Basic rate (up to £50,270) | 8.75% |
| Higher rate (£50,270 to £125,140) | 33.75% |
| Additional rate (above £125,140) | 39.35% |
Dividends received within an ISA or pension are completely tax-free and do not count toward the £500 allowance. If your total dividend income exceeds £10,000, you must file a Self Assessment return.
Real example
Priya is a company director who pays herself a salary of £12,570 and takes £40,000 in dividends. Her dividend tax calculation:
| Portion | Tax |
|---|---|
| First £500 (dividend allowance) | £0 |
| Next £37,200 at 8.75% (basic rate) | £3,255 |
| Remaining £2,300 at 33.75% (higher rate) | £776.25 |
| Total dividend tax | £4,031.25 |
Because her salary uses the Personal Allowance, the dividends start being taxed from the first pound (after the £500 allowance). The basic rate band runs out at £50,270 total income.
Who does this affect?
Company directors paying themselves through dividends are the largest group affected. Shareholders in any UK company receiving dividend payments, investors holding shares outside an ISA, and anyone with investment income from funds that pay dividends are all subject to these rules.
HMRC source
gov.uk/tax-on-dividends covers the dividend allowance, tax rates and how to report dividend income.
Related calculators: