The last few years have seen dividend tax rates steadily rise.
At the same time investors have seen a massive reduction in the already miserly tax-free dividend allowance.
Let’s update ourselves on where dividend tax rates and allowances now stand. We’ll then briefly consider how we got here, and what you can do about it.
Dividend tax rates and allowances
The rate of tax you’ll pay on your dividends depends on your income tax band.
UK dividend tax rates are currently:
- Basic-rate taxpayers: 10.75%
- Higher-rate taxpayers: 35.75%
- Additional-rate taxpayers: 39.35%
The basic and higher rates were increased on 6 April 2026.
Note that depending on your total earnings – and where it comes from – you could pay tax at more than one rate on your income.
Importing note: we’re talking here about dividends paid outside of tax shelters. Dividends paid within ISAs and pensions are ignored with respect to tax. Are you adding up your dividends for your tax return? Don’t include dividends paid in ISAs or pensions – forget about them when it comes to tax! (Remember them when it comes to reinvestment to get rich.)
The tax-free dividend allowance 2026 to 2027 and beyond
Back in April 2024, the annual tax-free dividend allowance was halved to just £500.
It’s still stuck there today. Yet another frozen tax threshold!
The good news is that this £500 dividend allowance means you at least escape dividend tax on your first £500 of dividend income.
Dividends you receive within this tax-free dividend allowance are not taxed, irrespective of how much non-dividend income you earn and your tax bracket. But breach the allowance and the rest is taxed, as per your income tax band.
Like other tax allowances such as the personal allowance for income tax, the dividend allowance runs over the tax year. (From 6 April to 5 April the next year).
(Incidentally, if you recall the allowance being much more generous, you’re right. It has been slashed over the past few years. More on that below.)
What are dividends, anyway?
Dividends are cash payouts made by companies:
- You may be paid dividends by shares listed on the stock market or by funds that own them.
- You might also be paid dividends from your own limited company, as part of your remuneration.
As mentioned, dividend tax is only applied on dividends paid outside of a tax shelter.
Hence using ISAs and pensions is key to shielding your income-generating assets from tax for the long-term.
What tax rate will you pay on your UK dividends?
If your dividend income exceeds the tax-free dividend allowance, you’ll pay tax on the excess.
This liability must be declared and paid through your self-assessment tax return.
For example, if you received £6,000 in dividends in a year, then tax is potentially charged on £5,500 of it. (£6,000 minus the £500 tax-free dividend allowance).
The rate you’ll pay depends on which tax bracket your dividend income falls into.
Beware of being bounced into a higher tax band
If you own dividend-paying shares outside of an ISA or pension, then dividends may increase your taxable income. Perhaps by enough to push you into a higher tax bracket.
If you own funds outside of tax shelters, you could also owe tax on reinvested dividends. Choosing accumulation funds doesn’t spare you the tax rod – unless they’re safely bunkered in your tax shelters.
The lesson again is to avoid taxes reducing your returns by using ISAs and pensions.
Watch out for withholding tax on dividends
If you’re paid dividends from overseas companies, you may be charged tax on them twice. Once by the tax authorities where the company is based, and again by His Majesty’s finest in the UK.
You may even pay this withholding tax on foreign dividends held in an ISA or pension.
However there are reciprocal tax treaties between the UK and some other countries. These can reduce the total amount of dividend tax you pay.
Your broker should take care of this for you. (Check though!)
Some territories do not charge withholding tax on dividends received in a UK pension. The US most notably. (This kindly treatment doesn’t apply to ISAs. Choose where you shelter your US shares accordingly.)
Again, make sure your platform is paying you any US dividends in your pension without any tax having been charged.
It can all get a bit fiddly. See our article on withholding tax.
Why was the old dividend tax system changed?
Then-chancellor George Osborne revamped UK dividend taxation back in the summer budget of 2015.
Osborne apparently wanted to remove the incentive for people to set themselves up as limited companies and then use dividends as a more tax-efficient way to get paid, compared to salaries.
Osborne also said the changes enabled him to reduce the rate of corporation tax.
Whatever his intentions, today’s regime applies equally to all dividends – whether received from ordinary shares or from limited companies.
Even worse, an initially fairly-generous dividend allowance of £5,000 – designed to prevent small shareholders being taxed on legacy portfolios – is now just £500.
At the same time dividend tax rates have ratcheted higher. Notably in 2022, when the rates were increased by 1.25 percentage points, and then in 2026, when the basic and higher rates were lifted by another two percentage points.
I hope you’re keeping notes at the back.
Admittedly, small investors have generaly not been hit by these changes. That’s because most of us hold our shares within ISAs and pensions, so we’re not affected by dividend taxation.
However there are exceptions.
Business owners paid a dividend by their limited companies now pay more tax. Their salary-sized dividends quickly chew through the £500 dividend allowance.
There is also a dwindling cohort of older investors who built up big portfolios of income shares outside of ISAs and pensions. They’re paying far more tax on dividends, too.
Always use your tax shelters
For years I urged such dividend-focused investors to move as much money as possible into ISAs.
They could have done this by defusing gains to fund their ISAs every year, for example.
Early action was important because the annual ISA allowance is a use-it-or-lose-it affair. Hence you must build up your total ISA capacity over many years.
Yet inexplicably to me, some of those unsheltered dividend investors argued – even in the Monevator comments – that there was no point.
Dividends were not taxed until you hit the higher-rate band, they said. So why bother?
Well, that was true under the old system. And maybe there was a hard choice to be made if you also had massive cash savings. In that case there was competition as to how to best to divvy up your annual ISA allowance.
But taxes on dividends were always vulnerable to change, like everything else in our convoluted tax code. And eventually they did.
At that point, the people who had declined to move some or all of their portfolios into ISAs – just to save a few quid – began to be hit with large tax bills.
I hate to say I told you so. (Truly – I run this blog to help people.)
ISA sheltering costs nothing. Even back then there was at most a trivial cost difference between an ISA and a trading account. Nowadays there’s usually none.
The moral of the story is to get any non-sheltered portfolios into an ISA (and/or a SIPP) as soon as possible.
Not only because of dividend tax, but also to shelter from capital gains taxes and future regulatory changes.
Note: Comments below may refer to old (or incorrect) dividend tax rates and allowances. Please check the dates if unsure.
