What are dividends and how are they taxed

A dividend is a distribution of a company’s profits to its shareholders. Companies may pay dividends in cash or additional shares, giving investors a share of the business’s earnings. Dividends are a common way for shareholders to earn income from their investments.

Dividends received within tax-advantaged accounts are completely tax-free. This includes dividends held in Individual Savings Accounts (ISAs) and in pensions, such as Self-Invested Personal Pensions (SIPPs) or other registered pension schemes. For investments outside these wrappers, dividends are subject to Income Tax, although all taxpayers benefit from a small £500 annual dividend allowance. This is in addition to the standard Personal Allowance of £12,570.

From April 2026, dividend tax rates will increase by 2%. The ordinary dividend rate will rise to 10.75%, while the upper dividend rate will increase to 35.75%. The dividend additional rate and the dividend trust rate will remain at 39.35%, and the dividend allowance will remain at £500.

Careful planning around dividend income is important in order to manage your overall tax liability.