Dividend Tax Explained
The allowance, this year's rate rise, and why dividends can spill into a higher rate faster than you'd expect
If you hold shares outside an ISA through a workplace share scheme like Save As You Earn (SAYE) or a Share Incentive Plan, or through general investing, any dividends they pay are taxed separately from your salary under their own allowance and rates. This page covers dividend income specifically; if you later sell those same shares for a profit, that's Capital Gains Tax instead, a distinct tax with its own rules. If it's bank or building society interest you're after rather than dividends, see Tax on Savings Interest, a very similar taxation method, just for a different kind of income.
The allowance and rates
Every year, the first £500 of dividend income is tax-free, regardless of your other income. Above that, the rate depends on which Income Tax band your total income falls into:
- Basic rate: 10.75%
- Higher rate: 35.75%
- Additional rate: 39.35%
These basic and higher rates have only just changed, up from 8.75% and 33.75% at the Autumn Budget 2025, effective this tax year. If you've seen the old figures quoted anywhere, they're now out of date.
Dividends paid on shares held inside an ISA are entirely exempt, no allowance needed, because none of it is taxable in the first place. That's the main reason workplace share schemes matter here: shares from a SAYE (Sharesave) scheme or a Share Incentive Plan don't sit in an ISA by default, so any dividends they pay are taxable exactly like any other shareholding, unless you've since transferred them into one.
How dividends stack on top of your other income
Dividend income isn't taxed on its own; it's added on top of your salary and other income to work out which band it falls into. Your salary uses up the Personal Allowance and basic-rate band first; dividends then stack above that, and can land in the basic rate, spill into the higher rate, or both at once.
Worked example: dividends stacking on salary
Someone earning £29,570 in wages and £3,000 in dividends: the wages use up the Personal Allowance, leaving £20,700 of the basic-rate band available, comfortably more than the dividends. The first £500 of dividends is tax-free (the dividend allowance); the remaining £2,500 is taxed at 10.75%, which is £268.75 in total.
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The allowance's hidden catch
The £500 allowance has a quirk worth flagging: it's taxed at 0%, but it still uses up band space as if it were taxed normally. It doesn't add extra headroom before the higher rate starts. If anything, it can eat into headroom you'd otherwise have used for cheaper, basic-rate dividends.
Worked example: the dividend allowance's band-space catch
A salary of £49,970 uses up the Personal Allowance and all but £300 of the basic-rate band. With £1,000 of dividends on top, the £500 allowance swallows that remaining £300 of basic-rate headroom, tax-free, but it still counts as "used", plus £200 of higher-rate headroom too.
The remaining £500 of dividends therefore sits entirely in the higher-rate band, at 35.75%: £178.75, none of it reaches the cheaper basic rate, even though the total dividend amount is small.
This page explains general Dividend Tax rules and is not personalised advice; see the disclaimer. It doesn't cover dividends received through a business you run yourself, which involves different considerations. See also Capital Gains Tax for what happens when you sell the shares themselves, and Income Tax Explained for how the underlying bands work.