Dividend Tax Explained
Dividend taxation in the UK is different from tax on salary or savings interest. This guide covers how UK dividend tax works in the 2025/26 tax year, including allowances, tax bands, and how dividends inside an ISA or SIPP are treated.
How Dividend Tax Works in the UK
If you receive dividends outside an ISA or SIPP, dividend income counts towards your total taxable income and is taxed after applying relevant allowances.
You do not pay tax when dividends are received; they are taxed through:
- your Self Assessment tax return, or
- an adjustment to your tax code if HMRC identifies additional income
There is no withholding tax on UK company dividends.
Dividend Allowance (2025/26)
All UK individuals receive a separate Dividend Allowance:
Dividend Allowance for 2025/26: £500
This means the first £500 of dividend income each tax year is tax-free.
This allowance is in addition to the Personal Allowance of £12,570 for most people.
Dividend Tax Rates (2025/26)
After your allowances are used up, dividend income is taxed according to your income band:
- 8.75% – Basic rate
- 33.75% – Higher rate
- 39.35% – Additional rate
These rates apply across the UK, including Scotland. (Scotland uses different income bands for employment income, but dividend tax is UK-wide.)
Dividends Inside an ISA or SIPP
Dividends earned inside a:
- Stocks & Shares ISA
- Lifetime ISA
- SIPP pension
are 100% free from UK income tax and capital gains tax. They also do not count towards your Dividend Allowance.
For most long-term UK investors, holding dividend-paying shares inside an ISA or SIPP eliminates dividend tax entirely.
Foreign Dividends
Dividends from foreign companies may have withholding tax applied by that country. Many countries have double-taxation treaties with the UK, which:
- reduce withholding tax, or
- allow you to claim some back
Inside an ISA or SIPP:
- ISAs still suffer withholding tax
- SIPPs often benefit from reduced or zero withholding (depends on jurisdiction)
Example: How Dividend Tax Is Calculated
Suppose you receive:
- £1,500 of dividends
- You have not used your Dividend Allowance (£500)
- You are a basic-rate taxpayer
Taxable dividends: £1,500 − £500 = £1,000 Tax rate: 8.75%
Tax due: £87.50
Interactive: UK Dividend Tax Calculator (2025/26)
Enter your total annual dividends and income to estimate your dividend tax for the year.
How to Reduce or Avoid Dividend Tax Legally
Common strategies include:
- Use an ISA – all dividends are tax-free
- Use a SIPP – tax-free growth; contributions receive tax relief
- Split investments with a spouse to use both allowances
- Use the £500 Dividend Allowance each year
For most long-term UK investors, using ISAs and SIPPs is the simplest and most effective method.
Summary
Outside tax wrappers, dividends are taxed based on your income level after applying the Personal Allowance and the £500 Dividend Allowance. Dividend rates are lower than income tax rates, but high dividend income can still result in unexpected tax bills.
Holding investments inside ISAs or SIPPs completely eliminates UK dividend tax and simplifies your tax situation.