Why is the tax-free dividend allowance only £500 in 2026/27?

Full answer

The dividend allowance is the amount of dividend income each person can receive tax-free each year, on top of their personal allowance, before dividend tax rates apply. When it was introduced in April 2016 to replace the old dividend tax credit system, the allowance started relatively generous at £5,000 a year. Since then it has been cut repeatedly: down to £2,000 from April 2018, down again to £1,000 from April 2023, and down to its current level of £500 from April 2024, where it has remained for 2026/27. Each cut has increased the tax bill for anyone receiving dividend income above the new, lower threshold -- most significantly affecting company director-shareholders who pay themselves a low salary plus dividends, and investors holding shares outside tax-efficient wrappers like ISAs and pensions. The policy reasoning behind the repeated cuts has consistently been to reduce the tax advantage of extracting income as dividends rather than salary. Dividends are not subject to National Insurance at all, whereas salary above the relevant thresholds attracts both employee and employer National Insurance, so paying dividends instead of salary has long been more tax-efficient for company owners, even after dividend tax rates were introduced. By steadily shrinking the tax-free allowance (alongside earlier increases to the dividend tax rates themselves, which also rose by two percentage points from April 2026, taking the basic rate from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%), successive governments have narrowed this gap, making dividends progressively less advantageous compared with salary for small business owners, even though dividends remain more tax-efficient than salary for most director-shareholders overall once National Insurance savings are factored in. Because the allowance has fallen so far from its original £5,000 level, dividend income that once sat comfortably tax-free -- for example, £3,000 of dividends from a small share portfolio -- is now largely taxable, which is part of why holding investments inside a Stocks and Shares ISA, where dividends remain entirely tax-free with no £500 cap, has become increasingly important for investors outside pensions. Use the dividend-tax calculator to see how much of your dividend income is taxable this year.

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More answers

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