The £500 tax-free dividend allowance – how does it work?

In April 2016, as part of a major dividend tax overhaul, a new ‘dividend allowance’ was created – a nil-rate tax band on the first £5,000 of dividend income.

However, this allowance has shrunk over time to a mere £500 from April 2024 onwards.

April 2016 changes to dividend taxation

Although the allowance itself may appear to be a tax giveaway, it was announced as part of much wider changes to the way dividends are taxed.

Before April 2016, dividends were paid ‘net’ to shareholders, who also received a tax voucher to reflect that the company’s income had already been subject to Corporation Tax.

These net dividends were multiplied by 10/9 to produce the ‘gross’ dividend upon which income tax was payable.

A much simpler, but far more punitive dividend tax regime was introduced in April 2016.

Under the new system introduced in 2016, dividend income above the then £5,000 dividend allowance was taxed at the applicable dividend rate, depending on the tax band the income fell within.

As a result of the reforms, almost all company owners pay significantly more tax on dividend income than they did before.

Dividend allowance progression since April 2016

Source: GOV.UK Tax on dividends (link) and official policy papers on reductions. Allowance stable at £500 since April 2024.

Changes to the dividend allowance from April 2018

Chancellor Philip Hammond first announced the reduction of the allowance from £5,000 to £2,000 during the Spring 2017 Budget; the measure was dropped from the first Finance Bill 2017 due to the General Election.

Despite shareholders’ wishful thinking across the UK, the measure was reintroduced in the second Finance Bill 2017 and became law on 16th November 2017.

Dividend allowance cut to £500 from April 2024

On 17th November 2022, the Chancellor announced that the allowance would be cut from £2,000 to £1,000 from April 2023, and to £500 from April 2024 onward.

How does the dividend allowance work in 2026/27?

Put simply, the first £500 of dividend income that would otherwise be taxable is taxed at 0% during the tax year.

However, importantly, the allowance does not reduce your total income for tax purposes. Many people overlook this point when calculating their potential tax liability.

For example, during the 2026/27 tax year, for a small company owner earning a £6,500 salary and £43,770 in dividends (using the entire basic rate tax band), you calculate your dividend tax liability as follows:

• Your £6,500 salary is less than the £12,570 personal allowance, so no tax is payable.
• The first £6,070 of dividends use up the rest of the £12,570 tax-free personal allowance.
• The dividend allowance covers the next £500 of dividends, but uses up £500 of the basic rate tax band.
• The next £37,200 of dividends are taxed at the basic rate (10.75%), resulting in £3,999 in tax.
• The total dividend tax bill for the year is £3,999

Dividend tax hike from April 2026

The basic and higher dividend tax rates increased by 2 percentage points to 10.75% and 35.75%, respectively, from 6th April 2026. The additional rate remains 39.35%, and the dividend allowance remains a mere £500.

Find out more

• For the official description of this tax measure and examples, click here.
• Use our salary and dividend calculator to work out your tax liability for 2026/27.
• Read our main guide on how dividends are taxed.