What is the dividend allowance?
The dividend allowance is the first £500 of dividend income each tax year, which is taxed at 0% whatever your income tax band.
What the dividend allowance means
Everyone who receives dividends gets a dividend allowance. It started at £5,000 in 2016 and has been cut several times; since April 2024 it has been £500. Dividends above it are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band for 2026/27.
The allowance is not extra tax-free income on top of your bands. Dividends covered by it still count towards your total income and use up band space. Any unused personal allowance also covers dividends before the dividend allowance applies.
Example
A director takes a salary of £12,570 and dividends of £30,000 in 2026/27.
| Step | Amount |
|---|---|
| Salary, covered by the personal allowance | £12,570 |
| Dividends covered by the dividend allowance | £500 |
| Remaining dividends taxed at 10.75% | £29,500 |
| Dividend tax due | £3,171.25 |
All £42,570 of income sits within the basic rate band, so none of the dividends reach the 35.75% rate.
How dividends are taxed above the allowance
Dividends are treated as the top slice of your income, after salary, pensions, rental profits and savings interest. That means your other income decides which band your dividends fall into. A director with a £50,000 salary would pay 35.75% on almost every pound of dividend above the £500 allowance, because the salary has already used the basic rate band. Keeping salary low and using dividends within the basic rate band is why so many directors take a salary of around £12,570.
Why it matters for your business
The allowance is small, but each spouse or civil partner has their own, and dividends from shares held in an ISA do not use it at all. Dividends over £10,000 a year usually mean you need to file a Self Assessment return; below that you can ask HMRC to collect any tax through your tax code instead. You can work out your own figures with our dividend tax calculator.
Common questions
If you are not otherwise in Self Assessment and your dividends are within the £500 allowance, there is no tax to pay and normally nothing to report. If you already file a tax return, include all dividends received, even those covered by the allowance.
No. It is £500 per person per tax year, across all the dividends you receive from every company and investment fund, outside ISAs and pensions. A director with shares in two companies gets one £500 allowance in total.