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How much is the dividend tax free allowance?
The dividend allowance has fallen sharply in recent years, dropping from £5,000 a year in 2017/18 to just £500 a year today. As a result, more investors may have tax to pay on dividend income held outside an ISA. If you receive dividends from shares or funds, it is worth knowing where you stand. A smaller allowance can quickly turn what once seemed like modest investment income into an unexpected tax bill.
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What is a dividend?
Dividends are periodic payments made to shareholders by the companies they have invested in. It is a slice of the company’s post-tax profits that is ‘divided up’ among its shareholders. Clearly, the dividend amount is variable and is dependent on strong corporate performance in order for them to pay out to shareholders.
Is there a tax free Allowance for dividends in the UK?
In the UK, HMRC allows individuals to receive a certain amount of dividend income before they start paying tax, known as the dividend tax free allowance.
This allowance was first introduced on 6 April 2016 to all UK residents, replacing the dividend tax credit at that time.
How much dividend is tax free?
In the 2026/27 tax year, the first £500 of dividend income is tax free.
This means you can receive up to £500 in dividends from shares and some equity based collective investment funds before dividend tax applies. If your total income is within your Personal Allowance, which is £12,570 for most people in the 2026/27 tax year, you may also pay no tax on your dividends.
Dividend income received within ISAs and pensions is not subject to dividend tax. This is one reason these allowances can be useful when building a tax efficient investment strategy.
Understanding tax on dividends
Once the amount of dividend income an individual receives breaches the dividend allowance, the level of tax you pay on this income depends on what level of total income you receive in any given tax year.
| Tax Band | Income Level | Income Tax Bracket | Dividend Tax Bracket |
|---|---|---|---|
| Personal Allowance | £0-£12,570 | 0% | 0% |
| Basic Rate | £12,571-£50,270 | 20% | 10.75% |
| Higher Rate | £50,271-125,140 | 40% | 35.75% |
| Additional Rate | Over £125,140 | 45% | 39.35% |
The above table shows the level of tax you will pay if you receive more than £500 worth of dividend income in the current tax year. If your total income for the year is less than the Personal Allowance, which sits at £12,570 in the current tax year, you will also not pay tax on your dividend income.
Dividend tax rates are less than income tax rates, making dividends a more favourable form of income. Individuals who own their own limited company can take dividends from the profits of their company instead of a salary in order to decrease their tax liability for a given tax year.
Can I transfer tax free allowance to share dividend allowance?
Although it is not possible to transfer your dividend allowance to your spouse, like it is with part of the Personal Allowance, transferring dividends to your spouse is an effective way to mitigate dividend tax if one member of the couple falls into a lower tax bracket than the other. As assets can be passed between spouses free of inheritance tax implications, assigning shares to the lower earner means that any dividend income they receive over the dividend allowance will be taxed in accordance with their relevant, lower rate of dividend tax. For this to be effective, the transfer of the shares/investment should be a genuine and unconditional transfer of ‘beneficial’ ownership, from which the transferor should receive no benefit.
Please keep in mind this is a complex area of taxation and such work should be undertaken with the help of your accountant or financial adviser.
How do I pay dividend tax?
Unlike a salary, dividends are not taxed at source. If you earn under the dividend allowance of £500, you do not need to do anything. If you earn above this, but below £10,000 in the current tax year, you must contact HMRC. HMRC will give you the option of either adjusting your tax code to pay your dividend tax liability or completing a self-assessment tax return.
If you earn over £10,000 of dividend income in the current tax year, your only option for paying your dividend tax bill is by completing a self-assessment tax return.
Self-assessment tax returns must be completed for the previous tax year by 31st October if choosing to fill in a paper form or 31st January if you opt of an online form. For example, you must complete your online tax return for the 2023/24 tax year by 31st January 2025.
How we can help
Whether you are a business owner who would like to efficiently draw an income from your business, or you are receiving income from your investments, we can build an effective, tax efficient income strategy that suits you and your family's needs. We make it a priority to stay on top of legislative changes to taxes applicable and work with a number of client accountants to ensure we have the most up to date tax information available for each client.
If you’d like to learn more about how we can help you, why not get in touch for free initial review with one of our expert advisers.
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The FCA does not regulate estate or tax planning.
The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
