What dividend income is
In brief: Dividends from investments in a GIA are taxable above a £500 annual allowance. The rate depends on your income band. Dividends inside ISAs and pensions are sheltered from this tax entirely.
When a company distributes a share of its profits to shareholders, those payments are called dividends. Investors in individual shares, funds, and investment trusts typically receive dividends as a regular income.
How dividends are taxed depends entirely on which account (wrapper) holds the investment.
The annual dividend allowance
Each person in the UK has an annual dividend allowance — an amount of dividend income that is free from dividend tax. The current allowance is £500 per tax year (reduced from £1,000 in April 2024 and from £2,000 in April 2023).
Dividends within the allowance are tax-free regardless of which tax band you fall into. Dividends above the allowance are taxed at the rates below.
Dividend tax rates
Dividends above the allowance are taxed at the following rates (from April 2026, following the Autumn Budget 2025 increase):
- Basic rate taxpayers: 10.75%
- Higher rate taxpayers: 35.75%
- Additional rate taxpayers: 39.35%
Your dividend tax rate depends on your income band — that is, how much other non-dividend income you have. Dividends are stacked on top of income for the purpose of determining which rate applies.
How dividends stack on top of income
The calculation works in layers:
- Total all non-dividend income (pension, employment, rental, interest).
- Determine which income tax band you are in.
- Dividends are added on top. Any dividends that fall within remaining basic rate capacity are taxed at 10.75%. Dividends pushed into the higher rate band are taxed at 35.75%.
For example, if your pension income is £48,000 (within the basic rate band, which runs to £50,270), you have £2,270 of basic rate band remaining. The first £500 of dividends is within the allowance. Dividends from £501 to £2,770 would be taxed at 10.75%. Dividends beyond that push into the higher rate band and would be taxed at 35.75%.
How the wrapper affects dividend tax
The account you hold investments in determines whether dividend tax applies at all:
ISA (Stocks & Shares ISA): Dividends received inside an ISA are completely tax-free. No dividend tax, no income tax, no reporting required. This makes ISAs a wrapper that shelters dividend-producing investments from tax.
SIPP / DC pension: Dividends inside a pension are not taxed as they arise. Instead, the entire pension pot grows tax-deferred. You pay income tax only when you withdraw from the pension — and at that point you are taxed on the withdrawal as income, not specifically on dividends.
GIA (General Investment Account): Dividends received in a GIA are taxable above the £500 allowance. The dividend is taxed at 10.75%, 35.75%, or 39.35% depending on your income band. GIA dividends must be declared on a self-assessment tax return.
Dividend income in retirement projections
Retirement projections model GIA dividend income using a dividend yield assumption applied to the GIA balance each year. Dividend tax is calculated on the taxable portion (above the £500 allowance) after stacking dividends on top of other income.
Dividends inside ISA and pension wrappers are not subject to separate dividend tax — consistent with how these wrappers work in practice.
These projections are for modelling purposes only. They do not constitute financial advice. Tax rules are subject to change. Please consult a qualified financial adviser before making financial decisions.