Your dividend allowance explained: 2025/26 tax year

Summary

• The dividend allowance for the 2025/26 tax year is the same as the 2024/25 tax year. 
• Your dividend allowance is £500 of dividend income earned tax-free. The amount of tax you’ll pay on dividends earned above that threshold depends on how much you earn.
• You won’t pay tax on dividends earned in a tax-wrapper account like an ISA or SIPP.

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What is the dividend allowance for 2025/26?

Dividend tax rules changed last year. But this year, the allowance is staying put.

For UK investors, understanding how your dividend income is taxed in the 2025/26 tax year could make a big difference to your bottom line. Take a look at what's happened to dividend taxes and allowances, and how you can protect yourself from paying additional tax this year.

Before diving in, it's important to understand what a dividend is, and whether you're earning them through your investments.

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What’s a dividend?

When a company makes a profit, it can choose to reinvest it, or to pay some of that money out to shareholders: that’s called a dividend. Some investors use dividends as a source of income from their shares.

Dividends are just one of many types of income HMRC wants to hear about. If you receive dividend income, it's included in your other sources of income (like your salary or rent payments if you're a landlord), and it then becomes part of your taxable income.

The dividend tax allowance is the amount you can receive tax-free. For the 2025/26 tax year, your allowance is £500. And remember: that’s separate from your personal savings allowance, which covers interest, not dividends.

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How has the dividend allowance changed?

The dividend allowance decreased last tax year, for the second year in a row. While it was £1,000 for the 2023/24 tax year, that dropped to £500 for 2024/25. This remains the amount of dividend income you can pocket for 2025/26 before tax kicks in.

If you invest in stocks and shares as a company shareholder, that £500 might not go very far.  Especially if you hold dividend stocks or funds.

It’s also worth noting that your personal savings allowance, which covers interest earned in savings accounts, doesn’t apply to dividends. Under current tax rules, dividend income gets its own treatment. 

There are still ways to protect yourself from income tax on dividends, though. You can shield your investments from UK dividend tax and capital gains tax when they’re held in an ISA or SIPP.

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How dividends are taxed

After you use up your tax-free dividend allowance, any extra income from dividends gets taxed based on your income level.

Here are the current income tax bands in the UK:

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And here are the current rates of tax UK investors will pay on their dividend income above the £500 allowance:

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How much in dividends can I earn tax-free?

As a basic rate taxpayer, you get a £12,570 personal allowance plus £500 tax-free dividends. That means your first £12,570 in income and your first £500 in dividends are earned tax-free.

Once your total income breaches the basic rate band, you’ll move into higher tax territory.

If you're a higher-rate taxpayer, you still have your full personal allowance and dividend allowance. Everything you earn over that £500 will be taxed at 33.75% if it's in a general investing account rather than a stocks and shares ISA or self-invested personal pension (SIPP).

Some higher-rate taxpayers will have a different personal allowance. It goes down by £1 for every £2 that their adjusted net income is above £100,000. This means their allowance can fall to zero if their income is £125,140 or above. Additional rate taxpayers do not have a personal tax allowance.

Dividend tax is based on your overall income tax band, but the rates for dividends are different from those for other types of income, like salary.

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How do I calculate my dividend allowance?

Here’s how to work out what you owe:

1. Add up all your income. This includes salary, rental income, dividends, and any other earnings for the year.
2. Subtract your personal allowance. For most people, that’s £12,570. But remember, it tapers off if your income is over £100,000.
3. Determine your income tax band. Look at what’s left after the personal allowance. This tells you whether you fall into the basic, higher, or additional rate bracket.
4. Apply the £500 dividend allowance. No matter your tax band, the first £500 of dividend income is tax-free.
5. Calculate the remaining dividend income. Subtract the £500 allowance from your total dividends. As a reminder, what’s left will be taxed at:‍
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   • 8.75% if it falls in the basic rate band‍
   • 33.75% in the higher rate band‍
   • 39.35% in the additional rate band.
     
     If your dividend income spans more than one band, you'll pay different rates on each portion.

6. Report it via Self Assessment. If any dividend tax is due, you’ll need to declare it on your Self Assessment tax return by 31 January following the end of the tax year. For the 2024/25 tax year, which ended 5 April 2025, the deadline is 31st January 2026.

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What tools can I use to avoid dividend taxes?

Now to the good news: you’ve got two main options to shelter your investments from UK dividend and capital gains tax.

Stocks & shares ISA (Individual Savings Account)

When you invest in an ISA, all UK dividends you earn are tax-free. You can invest up to £20,000 per year into ISAs. You can’t roll over unused allowance, so try to make the most of your allowance every year.

SIPP (self-invested personal pension)

Similarly, any income from dividends earned inside a SIPP isn't taxed while your money grows. The annual limit for most taxpayers is £60,000. When you retire, you’ll pay income tax on your withdrawals, but not on the investment growth.

Using these tools helps you control your taxable income, reduce dividend tax liability, and protect more of your returns.

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Get up to £200 cashback with a Freetrade ISA

Get 1% cashback with your Freetrade ISA when you top up £5,000 or more between now and 31 August 2025. 

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Important information

When you invest, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest. Other charges may apply. 

ISA and SIPP eligibility rules apply. Tax treatment depends on your personal circumstances and current rules may change.

A SIPP is a pension designed for you to save until your retirement and is for people who want to make their own investment decisions. You can normally only draw your pension from age 55 (57 from 2028), except in special circumstances.

At present, Freetrade only supports Uncrystallised Fund Pension Lump Sums (UFPLS) for customers who wish to withdraw funds from their SIPP after their 55th birthday. We strongly encourage you to seek financial advice before making any withdrawals from your SIPP.