The £500 Dividend Allowance: What It Means for a Side Income in 2026/27
How the £500 tax-free dividend allowance works alongside a main salary in 2026/27, including the rates that apply above it and a worked example.
2026/27 Dividend Tax Rates
| Band | Rate on dividends above £500 allowance |
|---|---|
| Tax-free allowance | £500 |
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Worked Example: £3,000 Dividend Income, Basic-Rate Taxpayer
| Step | Calculation | Amount |
|---|---|---|
| Tax-free allowance | £500 | |
| Taxable dividend income | £3,000 - £500 | £2,500 |
| Dividend tax (basic rate) | £2,500 × 10.75% | £268.75 |
| Net dividend income after tax | £3,000 - £268.75 | £2,731.25 |
How the Allowance Has Shrunk
| Tax year | Dividend allowance |
|---|---|
| Several years to 2022/23 | £2,000 |
| 2023/24 | £1,000 |
| 2024/25 onwards (incl. 2026/27) | £500 |
The steady reduction means small-scale dividend income — from a modest share portfolio, or a small company's director dividends — now hits the taxable threshold far more quickly than it did a few years ago.
Salary vs Dividends for Company Directors
| Factor | Salary | Dividends |
|---|---|---|
| National Insurance | Yes (employee + employer, above thresholds) | No |
| Corporation Tax deduction | Yes (reduces company profit) | No (paid from post-tax profit) |
| Personal tax treatment | Income Tax via PAYE | Dividend tax rates |
The optimal split between a small salary and dividends for owner-directors depends on Corporation Tax rates, National Insurance thresholds and the dividend allowance together — since all three have changed in recent years, it's worth reviewing the mix annually rather than assuming a previous year's split is still optimal.
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Open Take-Home Pay calculatorFrequently asked questions
How much is the tax-free dividend allowance in 2026/27?
£500 per tax year. Dividend income up to this amount is tax-free regardless of your other income, though it still counts towards which Income Tax band your total income falls into.
What are the dividend tax rates above the allowance in 2026/27?
10.75% for basic-rate taxpayers, 35.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers, on dividend income above the £500 allowance. The basic and higher dividend rates rose by 2 percentage points from 6 April 2026.
How much tax is due on £3,000 of dividends for a basic-rate taxpayer?
The first £500 is tax-free. The remaining £2,500 is taxed at 10.75% for a basic-rate taxpayer, giving a dividend tax bill of £268.75.
Do dividends count towards my Personal Allowance?
No, dividends don't use up the Personal Allowance directly, but total income (salary plus dividends) determines which tax band your dividend income falls into — someone with a £45,000 salary and £5,000 of dividends may find some of those dividends pushed into the higher-rate dividend band even though the salary alone is basic rate.
Is it more tax-efficient to take dividends instead of salary from my own company?
Often yes for company directors, since dividends aren't subject to National Insurance (unlike salary above the primary threshold), though the company itself pays Corporation Tax on profits before they can be distributed as dividends — the optimal salary/dividend split depends on individual circumstances and should be checked each tax year as rates change.
Do I need to declare small dividend income to HMRC?
If total dividend income is below £500, generally no separate declaration is needed. Above £500, most taxpayers need to report it via Self Assessment, though HMRC may in some cases adjust a tax code instead for smaller amounts — check current guidance for your specific situation.
Are dividends from an ISA covered by the £500 allowance?
No — dividends earned within a Stocks and Shares ISA are entirely tax-free regardless of amount, and don't use up or interact with the separate £500 dividend allowance, which only applies to dividends held outside a tax wrapper.
Has the dividend allowance always been £500?
No, it has been cut sharply in recent years — it was £2,000 for several years before being reduced to £1,000 in 2023/24 and then to £500 from 2024/25 onwards, where it remains for 2026/27.
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