How are dividends taxed in the UK?
Dividends have their own tax rules, lower than the rates on salary, but they stack on top of your other income. Here is the £500 allowance, the three dividend rates, a worked example, and the legitimate ways to pay less.
The £500 dividend allowance
Everyone gets a tax-free dividend allowance of £500 for 2026/27. The first £500 of dividends you receive in the year is tax-free. It's much smaller than it used to be (it was £2,000 as recently as 2022/23), so most people with shares outside an ISA now pay some dividend tax.
The dividend tax rates for 2026/27
Above the allowance, the rate depends on which Income Tax band the dividends fall into:
| Band | Dividend rate |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
These are noticeably lower than the 20%, 40% and 45% you'd pay on the same amount as salary, which is part of why dividends are attractive.
How dividends stack on your salary
Dividends are treated as the top slice of your income. Your salary and other income use up your personal allowance and tax bands first; the dividends then sit on top and are taxed at the dividend rate for wherever they land. That means one dividend payment can be taxed partly at 10.75% and partly at 35.75%.
Salary £40,000, dividends £5,000: the first £500 is tax-free, leaving £4,500. It all sits in the basic-rate band, so the tax is 10.75% of £4,500 = £484.
The same £5,000 as a higher-rate taxpayer would be taxed at 35.75%, costing about £1,609.
Work out your own dividend tax
Enter your salary and dividends to see the tax, the split across the 10.75%, 35.75% and 39.35% bands, and what you keep.
Open the Dividend Tax calculator →No National Insurance (why directors use dividends)
Dividends carry no National Insurance, unlike salary. That's the main reason many company directors take a small salary, often around the personal allowance, and draw the rest of their income as dividends: they skip employee and employer National Insurance and pay the lower dividend rates. The company pays Corporation Tax on its profits first, so it isn't tax-free money, but the combination is often cheaper than a pure salary.
How to pay less dividend tax
- Use an ISA. Dividends on shares and funds inside a Stocks and Shares ISA are completely tax-free and don't touch your £500 allowance.
- Use your £500 allowance every year, it doesn't carry forward.
- Share with a spouse or civil partner. Transfers between you are tax-free, so a couple can use two allowances and two sets of bands.
- Pension contributions can extend your basic-rate band, keeping more of your dividends at 10.75% rather than 35.75%.
Frequently asked questions
How much tax do you pay on dividends?
After the £500 allowance, 10.75% (basic), 35.75% (higher) or 39.35% (additional), depending on your total income for 2026/27.
What is the dividend allowance?
£500 for 2026/27. The first £500 of dividends is tax-free, but still counts towards your income for band purposes.
Do you pay National Insurance on dividends?
No. Dividends are free of NI, which is why directors often mix a small salary with dividends.
How do I reduce dividend tax?
Hold shares in an ISA, use your allowance, share holdings with a spouse, and consider pension contributions.
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Illustrative and educational only, not financial or tax advice. Assumes England, Wales or NI rates, a standard tax code and dividends taxed as your top slice of income. Your circumstances change the result. Always check gov.uk or speak to an accountant.