Dividend tax explained: how much tax do you pay on dividends?

Every tax year, the first £500 of dividend income is tax-free — this is the dividend allowance. It's separate from your £12,570 Personal Allowance, so you can use both.

One catch: even though the allowance itself is tax-free, dividends within it still count as income for other purposes, such as working out whether the Personal Allowance taper applies once your total income passes £100,000.

Above the allowance, dividends are taxed at rates that depend on which Income Tax band they fall into once stacked on top of your other income:

Dividends are always treated as the top slice of your income. Your Personal Allowance and the lower tax bands are used up by salary, self-employment profit, or other income first — dividends only pick up the bands from wherever that other income leaves off.

For example, imagine a company director with a £30,000 salary and £30,000 of dividends in England, Wales, or Northern Ireland. After the £12,570 Personal Allowance, £17,430 of salary is taxable, all within the basic rate band, giving Income Tax of £3,486. The dividends then stack on top: the first £500 is covered by the dividend allowance, and the remaining £29,500 spans both the basic and higher rate bands, working out at £5,603.75 of dividend tax. The total bill across both is £9,089.75.

Notice that a meaningful chunk of the dividends end up taxed at the higher 35.75% rate — not because the dividends themselves are large, but because the salary has already used up most of the basic rate band.

If your dividends are within the £500 allowance, or they come from shares held in an ISA, you don't need to tell HMRC about them at all. Above the allowance, dividends are reported through Self Assessment, with any tax due by 31 January following the end of the tax year.