The dividend allowance explained (2026/27)
The dividend allowance is the slice of dividend income you can receive each year without paying any dividend tax. For 2026/27 it's £500. It sounds small, and it is, but understanding how it sits alongside your other allowances explains a lot about why directors and investors pay the tax they do.
How much is the dividend allowance?
It's £500 for the 2026/27 tax year. Everyone gets it, whether you're a company director paying yourself dividends or an investor holding shares outside an ISA. Dividends within the allowance are taxed at 0%. Anything above it is taxed at the dividend rates: 10.75% in the basic band, 35.75% in the higher band, and 39.35% in the additional band. The basic and higher rates each rose by 2 points from April 2026.
It used to be much bigger
The allowance has been cut sharply. It was £5,000 when it launched in 2016, then £2,000 for several years, then £1,000 for 2023/24, and now £500. Each cut pulls more dividend income into tax. An investor with a modest share portfolio who paid nothing a few years ago may now have a small tax bill on the same dividends. For company directors taking large dividends, the £500 barely registers against the total, but it still matters at the margins.
| Tax year | Dividend allowance |
|---|---|
| 2022/23 | £2,000 |
| 2023/24 | £1,000 |
| 2024/25 | £500 |
| 2025/26 | £500 |
| 2026/27 | £500 |
How it works with your personal allowance
These are two separate things, and the order matters. Your personal allowance (£12,570) covers your income generally, salary first, then dividends if there's any left. The dividend allowance (£500) is specific to dividends and sits on top. So a director taking a £12,570 salary uses the whole personal allowance on salary, then the first £500 of dividends is tax-free via the dividend allowance, and dividends above that start getting taxed.
One subtlety catches people out: the dividend allowance doesn't reduce your taxable income for band purposes. It's taxed at 0%, but it still uses up part of your basic-rate band. That's a quirk of how HMRC applies it, and it means the allowance saves you less than a simple "£500 tax-free" would suggest at higher income levels.
Who does the £500 allowance affect most?
Two groups feel it. Small investors holding dividend-paying shares outside an ISA now pay tax on more of their income, so an ISA wrapper is more valuable than it used to be. And basic-rate company directors, where £500 at 10.75% is only about £54 of tax either way, feel it least in cash terms but see it as one more erosion of the dividend route's advantage.
Work out your own dividend tax
The allowance is only one input. What you actually pay depends on your salary, your total dividends, and which tax bands they fall into. Put your figures into the dividend tax calculator to see the tax after the allowance, or read how the salary versus dividend split works across different profit levels.
This is general information based on HMRC's 2026/27 rates, not personal tax advice. Allowances and rates change at Budgets, so check the current figures before you plan around them.