How much is the tax free dividend allowance in 2025/26?

The dividend allowance means the first £500 of dividends you receive is tax-free. But how does this allowance work in practice in the 2025/26 tax year?

A brief history of the Dividend Allowance

The allowance was first implemented in April 2016, as part of a radical shake-up in the way dividends are taxed.

This resulted in an additional tax burden of several thousand pounds per year for many small company owners.

First implemented in April 2016

The one concession provided by the Government was the creation of a tax-free ‘dividend allowance’.

At first, this applied to the first £5,000 of dividend income. But, significantly, this sum sat within the relevant tax band for overall taxation purposes.

The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive.

Allowance cut in April 2018

In April 2018, the allowance was cut to £2,000 and stayed at that level for 5 years.

Further cuts in 2023/4 and 2024/5

At his Autumn Statement (17th November 2022), Chancellor Jeremy Hunt announced that the dividend allowance would be cut to £1,000 for the 2023/4 tax year, and to a mere £500 for the 2024/5 tax year.

How much is the dividend allowance in 2025/26 + 2026/27

The dividend allowance remains £500 in the 25/26 tax year.

It will remain at £500 in the 26/27 tax year – as confirmed in the November 25 Budget.

Dividend Allowance since 2016/17

How does the dividend allowance work in practice in 2025/6?

Here is an example of how this tax concession works for a limited company owner drawing down a £12,570 salary plus £50,000 dividends during the 2025/26 tax year.

You can input your salary/dividend mix into our dividend tax calculator.

• The £12,570 salary takes up the entire 2023/24 tax-free personal allowance.
• The first £500 of dividends is tax-free, due to the dividend allowance.
• The next £37,200 of dividends are taxed at 8.75% (basic rate) = £3,255.
• The remaining £12,300 dividends are taxed at 33.75% (higher rate) = £4,151.25.
• The total dividend tax liability is £7,406.25.

Notice how the £500 dividend allowance is tax-free, but still takes up the first £500 of your basic rate tax band (£0-£37,700)!

What about dividends paid into your pension or ISA?

Dividends paid into your pension or ISA are free from dividend tax and don’t count towards your dividend allowance.

Further Information

• The original dividend allowance factsheet from April 2016.
• You can download a Government explanation of the dividend allowance reduction to £2,000 following the 2017 spring budget.
• Government announcement on the 2023 reduction to £1,000 and subsequent reduction to £500 for the 2024/5 tax year.