Taxing dividends in 2025/26 

Dividends are payments by companies to their shareholders as a way of distributing profits. Because those profits are subject to corporation tax, dividends have been taxed at different rates than interest income and capital gains and are subject to their own tax rules.

Taxation of Dividends

In explaining ‘How dividends are taxed’, HMRC states first: ‘You do not pay tax on any dividend income that falls within your personal allowance (the amount of income you can earn each year without paying tax).’ The personal allowance is £12,570, so if income from all sources is less than this, then (generally) no income tax liability will arise. HMRC then adds: ‘You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance.’ For the 2025/26 tax year, this allowance is £500. However, while HMRC and others refer to the ‘dividend allowance’, it is not an allowance in the same way as the personal allowance, which can be deducted from income in calculating the amount that is subject to tax. Instead, the first £500 of dividend income is taxable at 0%. This ‘allowance’ is available regardless of total overall income, but note that it sits within the 20% basic tax band, which applies to the first £37,700 of taxable income.

Tax Liabilities

Dividend income above the £500 allowance is taxed at rates that depend on overall taxable income, which includes salary, pension, rental income, and savings interest. Dividend income is always treated as the top slice of income – meaning it is taxed after other forms of income have been assessed. For 2025/26, basic rate taxpayers (total income up to £50,270) pay tax at 8.75% on dividends above the allowance. Higher rate taxpayers (income between £50,271 and £125,140) pay tax on dividends at 33.75% and additional rate taxpayers (income over £125,140) pay tax at 39.35%. Note that in the Autumn Budget on 26 November 2025, the Chancellor of the Exchequer, Rachel Reeves, announced that the rates for basic and higher rate taxpayers would rise by two percentage points from 6 April 2026 to 10.75% and 35.75% respectively. The additional rate will remain at 39.35%.

Example: Employee Receives Dividends

Suppose Jane receives dividend income of £2,500 in 2025/26. Her total income, including salary, is £40,000, placing her within the basic rate band. The first £500 of her dividend income is tax-free due to the dividend allowance. The remaining £2,000 is taxed at 8.75%, resulting in a tax bill of £175 on her dividends. If her income was £75,000, the £2,000 dividends in excess of the £500 nil rate would be taxed at 33.75% – a tax liability of £675.

Reporting and Paying Dividend Tax

If dividend income exceeds £500, this must be declared to HMRC. For most taxpayers, this will be by an annual self-assessment tax return. However, it may be possible to inform HMRC by phone or have the tax collected through the PAYE tax code. It is important to keep accurate records of all dividends received, including statements from companies, investment platforms, and funds. This is particularly relevant if shares are held in many companies or through different investment accounts.

ISAs and Joint Accounts

Dividends received within an individual savings account (ISA) are exempt from income tax, so do not need to be reported to HMRC. This makes ISAs an attractive option for investors aiming to shelter dividend income from tax. For jointly held shares, dividend income is usually split equally between account holders unless there is evidence to the contrary. Each individual can apply their own dividend allowance and tax bands to their share of the income.

Conclusion

The taxation of dividend income is relatively straightforward but subject to frequent change. Investors should monitor annual Budget announcements and review their tax position regularly to ensure compliance and optimise their after-tax returns. Making use of tax-free wrappers like ISAs and understanding the interaction between dividends and other income are key strategies for effective tax planning.

Practical Tip

Dividends from foreign companies are generally taxed in the UK in the same way as UK dividends, but foreign tax may have been withheld at source, and double taxation relief may be available under the relevant double tax treaty. Professional advice may be required.