What is the dividend allowance?
Answered 11 March 2026
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The Dividend Allowance
What the law says
The dividend allowance is technically a "dividend nil rate" — a 0% rate of income tax applied to the first slice of an individual's dividend income each tax year. It is provided by section 13A of the Income Tax Act 2007 (ITA 2007), inserted by the Finance (No. 2) Act 2015.
The mechanism: Where an individual would otherwise be charged to income tax at the dividend ordinary rate, dividend upper rate, or dividend additional rate, s.13A instead charges income tax at the dividend nil rate (0%) on the first portion of that dividend income.
The nil rate is set at 0% by section 8(A1) of ITA 2007.
Historical changes to the allowance amount:
| Tax year | Allowance |
|---|---|
| 2016-17 to 2017-18 | £5,000 |
| 2018-19 to 2022-23 | £2,000 (reduced by Finance Act 2018, s.8) |
| 2023-24 | £1,000 |
| 2024-25 onwards | £500 |
How the nil rate is applied (current law — £500 threshold): The legislation works in three steps:
- First, up to £500 of income otherwise chargeable at the dividend ordinary rate is charged at the nil rate instead.
- If that £500 is not exhausted, any remaining allowance is applied to income otherwise chargeable at the dividend upper rate.
- Any further remaining allowance is then applied to income otherwise chargeable at the dividend additional rate.
Rates on dividends above the allowance were also set by the Finance (No. 2) Act 2015: the dividend ordinary rate was changed to 7.5%, the dividend upper rate to 32.5%, and the dividend additional rate to 38.1%.
HMRC guidance / practice
HMRC describes the allowance as a "£5,000 Tax Free Allowance for Dividend income" (as originally introduced from April 2016), noting that the Dividend Tax Credit was simultaneously abolished.
Key practical points from HMRC:
- Everyone can receive up to the allowance amount of dividend income tax-free, on top of any dividends received on shares held in an ISA.
- The dividend allowance is separate from and unaffected by the Scottish or Welsh rates of income tax — it applies at the same rate for all UK taxpayers.
- Where an individual's UK dividends are equal to or less than the allowance, HMRC will not issue a P2 coding notice. Only where dividends exceed the allowance will a P2 be issued.
- For PAYE purposes, HMRC adjusts tax codes to collect tax on dividend income above the allowance.
Example from HMRC guidance (illustrating the original £5,000 allowance): A higher-rate taxpayer with £70,000 of dividends would pay: £5,000 × 0% = £0 (dividend allowance), then £27,000 × 7.5% = £2,025, then £37,000 × 32.5% = £12,025, giving total dividend tax of £14,050.
⚠️ Note on current law: The allowance currently stands at £500 for 2024-25 and subsequent tax years, having been progressively reduced from the original £5,000. Some of the HMRC guidance in the retrieved sources pre-dates these reductions and still refers to the £5,000 figure.
Citation sources
PART 1 Direct taxes Income tax: investments Dividend nil rate for tax year 2018-19 etc 8 1 In section 13A of ITA 2007 (income charged at the dividend nil rate), for “£5000”, in each place, substitute “ £2000 ” . 2 The amendments made by this section have effect for the tax year 2018-19 and subsequent tax years.
From April 2016, the Dividend Tax Credit will be abolished and a new £5,000 Tax Free Allowance for Dividend income will be introduced. The new rates of tax on Dividend income above the allowance will be – - 7.5% for dividends taxed in the Basic Rate - 32.5% for dividends taxed in the Higher Rate - 38.1% for dividends taxed in the Additional Rate An allowance will be introduced so that everyone can receive up to £5,000 of Dividend income, on top of any dividends rece
ed under this Rule and Rule 1C are the only amounts charged at the dividend nil rate. Rule 2C: If the total of D and U is less than £500 but more than nil, U is charged at the dividend nil rate (rather than the dividend upper rate). Step 3 If the total of D and U is less than £500 , identify the amount (“A”) of the individual's income which would, ignoring this section, be charged at the dividend additional rate. Rule 3A: If the total of D, U and A is more than £500 , the first £X of A is charge
Part 2 Basic provisions Chapter 2 Rates at which income tax is charged Income charged at particular rates Income charged at the dividend nil rate 13A 1 Subsection (2) applies if, ignoring this section, at least some of an individual's income would be charged to income tax at the dividend ordinary rate, the dividend upper rate or the dividend additional rate. 2 Income tax is charged at the dividend nil rate (rather than the dividend ordinary rate, dividend upper rate or dividend additional rate)
PART 1 Income tax Rate structure Rates of tax on dividend income, and abolition of dividend tax credits etc 5 1 ITA 2007 is amended in accordance with subsections (2) to (8). 2 In section 6(3)(b) (other rates: dividends), before “dividend ordinary rate,” insert “ dividend nil rate, ” . 3 In section 8 (dividend ordinary, upper and additional rates)— a in the heading, after “The” insert “ dividend nil rate, ” , b before subsection (1) insert— A1 The dividend nil rate is 0%. , c in subsection (1) (
From April 2016, the Dividend Tax Credit will be abolished and a new £5,000 Tax Free Allowance for Dividend income will be introduced. The new rates of tax on Dividend income above the allowance will be: 7.5% for dividends taxed in the Basic Rate 32.5% for dividends taxed in the Higher Rate 38.1% for dividends taxed in the Additional Rate An allowance will be introduced so that everyone can receive up to £5,000 of Dividend income, on top of any dividends received on shares held in an ISA. If an
y tax at the same rates regardless of where they live. Tax due on untaxed dividend income. Dividends income is taxed at the at the same dividend rates regardless of their residency status. From 6 April 2016, the Dividend Tax Credit will be abolished and a new £5,000 Tax Free Allowance for Dividend income will be introduced. The new rates of tax on Dividend income above the allowance will be 7.5% for dividends taxed in the basic rate, 32.5% for dividends taxed in the higher rate and 38.1% for div
Income tax Dividend nil rate 7 1 In section 13A(2) of the Income Tax Act 2007 (income charged at the dividend nil rate), for “£2000”, in each place, substitute “£1,000” . 2 The amendments made by subsection (1) have effect for the tax year 2023-24. 3 In section 13A(2) of that Act (as amended by subsection (1) ), for “£1,000”, in each place, substitute “£500” . 4 The amendments made by subsection (3) have effect for the tax year 2024-25 and subsequent tax years.