What is Dividend Allowance?
The first £500 of dividend income each year is tax-free, regardless of your tax band.
Key Facts
- ✓ Tax-free dividend allowance: £500 (2025/26)
- ✓ Reduced from £2,000 in 2022/23
- ✓ Applies to all taxpayers regardless of band
- ✓ Dividends in ISAs and pensions are not taxed
- ✓ Uses up part of your tax band
Current Rates (2025/26)
- ▸ Dividend allowance: £500
- ▸ Basic rate: 8.75%
- ▸ Higher rate: 33.75%
- ▸ Additional rate: 39.35%
Explanation
The dividend allowance is an annual tax-free amount for dividend income. For 2025/26, the allowance is £500. This means the first £500 of dividends you receive in a tax year are not subject to dividend tax, regardless of which tax band you fall into. The allowance has been significantly reduced in recent years: it was £2,000 in 2022/23, £1,000 in 2023/24, and £500 from 2024/25 onwards. Dividends above the allowance are taxed at special rates that are lower than income tax rates: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. Dividends received within an ISA or pension wrapper do not count towards your dividend allowance and are not taxed. The dividend allowance does use up part of your tax band but does not reduce your Personal Allowance.
Try the calculator: Use our free calculator to see how dividend allowance affects your finances.
Dividend Tax Calculator →Other Glossary Terms
The system HMRC uses to collect income tax and National Insurance directly from employee wages.
National InsuranceA UK tax on earnings and self-employed profits that funds the state pension, NHS, and benefits.
Personal AllowanceThe amount of income you can earn each year before paying income tax — currently £12,570.
Basic Rate (20%)The 20% income tax rate applied to taxable income between £12,571 and £50,270.
Higher Rate (40%)The 40% income tax rate applied to taxable income between £50,271 and £125,140.
Additional Rate (45%)The 45% income tax rate applied to taxable income above £125,140.
Frequently Asked Questions
What does dividend allowance mean?
The first £500 of dividend income each year is tax-free, regardless of your tax band.
Why does dividend allowance matter?
Understanding dividend allowance helps you make informed financial decisions and ensure you pay the correct amount of tax. Getting it wrong could mean overpaying or underpaying HMRC, which may result in penalties or missed savings. Use our calculators to see how dividend allowance applies to your personal situation.
Where can I find more information about dividend allowance?
HMRC publishes official guidance on GOV.UK for all UK tax topics. For a quick overview, our glossary entries are written in plain English and updated each tax year. You can also use our free online calculators to model different scenarios and understand how changes to your income, deductions, or allowances affect your overall tax position.