What is dividend tax?
Dividend tax is income tax charged on dividends, which are payments companies make to their shareholders out of profits. In 2026/27 the first £500 is tax-free. Above that, rates are 10.75% for basic rate taxpayers, 35.75% for higher rate and 39.35% for additional rate taxpayers.
Dividends are paid from company profits that have already faced corporation tax. That is why dividend tax rates are lower than income tax rates on wages. The rates rose by two percentage points from April 2026, with the ordinary rate up from 8.75% and the upper rate up from 33.75%. The additional rate stayed at 39.35%.
The tax-free dividend allowance has been cut sharply, from £5,000 in 2017 to £500 since April 2024. Dividends held inside an ISA or a pension are completely free of dividend tax. Dividends are treated as the top slice of income, so they are taxed after wages and savings. For example, a basic rate taxpayer receiving £2,500 in dividends in 2026/27 would pay 10.75% on £2,000, which is £215.
Dividend tax matters most to company directors who pay themselves partly in dividends, and to people with large share portfolios outside ISAs. Paying through dividends avoids National Insurance, which is one reason governments have raised dividend rates. Critics say higher rates discourage investment and small business owners. Many small company owners now pay themselves a mix of a small salary and dividends.
Who it affects: Basic rate shareholders and company owners
The left tends to want dividends taxed closer to wages. It argues income from owning shares should not be treated more kindly than income from work.
The right tends to oppose rises, arguing dividends are already taxed through corporation tax and that higher rates deter investment.
Britain is split. Now you decide.
Adjust the dividend rates in the WeDecide Budget and see how business owners, investors and revenue respond.
Play WeDecide freeCommon questions
What is the dividend allowance for 2026/27?
It is £500 a year. Dividends above that are taxed at your dividend rate.
Do you pay tax on dividends in an ISA?
No. Dividends from shares held in an ISA or a pension are tax-free.
Why are dividends taxed less than wages?
Because the company has already paid corporation tax on the profits used to pay them.