How dividend tax works
Dividends are taxed differently — and usually more lightly — than salary. First, any unused Personal Allowance covers some dividends tax-free. Then the £500 dividend allowance is taxed at 0%. After that, dividends are taxed at the dividend rates, and crucially they sit on top of your other income to decide which band applies.
| Band | Dividend rate 2026/27 |
|---|---|
| Dividend allowance | 0% (first £500) |
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
A worked example
On a £50,000 salary with £20,000 of dividends: the salary uses up the entire basic-rate band, so the £500 allowance aside, almost all of the dividends fall in the higher-rate band at 33.75%. The dividend tax comes to about £6,581. The same £20,000 of dividends on a £12,570 salary would be taxed mostly at 8.75% — roughly £1,706 — because there's far more basic-rate band left.
Keep dividends tax-free
Dividends from shares held inside a Stocks & Shares ISA are completely tax-free and don't count towards your allowance. For investments held outside an ISA, you may also face Capital Gains Tax when you sell. Model your overall position alongside your take-home pay.
Dividend tax FAQs
What is the dividend allowance for 2026/27?
The tax-free dividend allowance is £500. The first £500 of dividends is taxed at 0%; only dividends above that (and above any unused Personal Allowance) are taxed at the dividend rates.
How much tax do I pay on £20,000 of dividends?
On £20,000 of dividends on top of a £50,000 salary, you owe about £6,581 in 2026/27 — the £500 allowance is free and the rest is mostly taxed at the 33.75% higher rate.
What are the dividend tax rates in 2026/27?
After the £500 allowance: 8.75% basic, 33.75% higher, 39.35% additional. Dividends stack on top of your other income to set the band.
Do I pay National Insurance on dividends?
No. Dividends are free of National Insurance, which is one reason company directors often take part of their income as dividends rather than salary.
