Lesson 7.2 · 2 of 5 · Tax, pensions and protection where you live
Dividend tax in the UK: allowance, rates and US dividends explained
In the UK the first £500 of dividends each tax year is tax-free. Above that you pay 10.75%, 35.75% or 39.35%, depending on your income band. Dividends inside an ISA or pension are not taxed, and there is no National Insurance on dividends.
Terms in this lesson
- Dividend
- The part of its profit a company pays to shareholders, in cash.
- Dividend yield
- How much the company pays you each year in dividends, compared with the share price.
- Stock
- A small piece of a company that you can buy on the stock exchange.
Opening question
In the 2026/27 tax year you are a basic rate taxpayer and receive £400 of dividends from shares in an ordinary account. You have no other dividends. With that year’s £500 dividend allowance, how much dividend tax do you pay?
£400 is within the £500 dividend allowance, so no tax is due. £43 would be 10.75% of £400, as if the allowance did not exist.
It does not matter if you get it wrong: trying first helps you remember.
How dividend tax works in the UK
Definition
What decides the rate?
Your income band, with dividends added on top of your other income.
First, any unused Personal Allowance can cover dividends. Then the first £500 of dividends is tax-free whatever your band. The rest is taxed at the dividend rate for the band it falls into, after your salary or pension has filled the bands below it.
The basic and higher dividend rates rose by 2 percentage points on 6 April 2026.
| Income band (total income) | Rate on dividends above the allowance |
|---|---|
| Basic rate: up to £50,270 | 10.75% |
| Higher rate: up to £125,140 | 35.75% |
| Additional rate: above £125,140 | 39.35% |
Total income, for England, Wales and Northern Ireland, with the standard £12,570 Personal Allowance. Scotland has its own bands for wages, but dividends are taxed at the same UK rates and bands shown here.
Work it out
You are a higher rate taxpayer and receive £3,000 of dividends in an ordinary account in the 2026/27 tax year. With the £500 allowance and the 35.75% higher rate, how much dividend tax do you pay, in pounds?
A hint
Take off the £500 allowance, then apply 35.75%.
£3,000 - £500 = £2,500. At 35.75%: £893.75. A basic rate taxpayer would pay 10.75% on the same £2,500: £268.75.
- “The allowance means £500 is taxed at a lower rate”It is taxed at 0%, but it still uses up part of your income band, which can push the rest into a higher band.
- “Accumulating funds avoid dividend tax”In an ordinary account, income a fund keeps and reinvests is still taxable as yours. Only an ISA or pension removes the tax.
- “Dividends count as earnings for National Insurance”They do not. You pay dividend tax only.
Tax on US dividends: withholding and the W-8BEN form
Definition
Why is part of a US dividend missing?
The US keeps its tax before the money reaches you.
For investors outside the US, the standard US withholding rate is 30%. The tax treaty between the UK and the US cuts it to 15% for ordinary shareholders, but only if your broker has your W-8BEN form, which confirms you live in the UK. Most UK brokers ask you to fill it in online when you first buy US shares.
US tax withheld on dividends paid to UK residents.
HMRC then taxes the same dividend at the UK rate, but lets you take off the US tax already paid. This is called Foreign Tax Credit Relief. The credit is capped at the treaty rate and at the UK tax on that dividend. So a basic rate taxpayer usually has nothing more to pay on a US dividend, while a higher rate taxpayer pays the difference.
Work it out
You are a higher rate taxpayer and your dividend allowance is already used up by UK dividends. In 2026/27 you receive a £2,000 US dividend, and with your W-8BEN in place the US withholds 15%. With the UK higher rate of 35.75%, how much more do you pay to HMRC, in pounds?
A hint
Work out the UK tax, then take off the US tax as a credit.
UK tax: 35.75% × £2,000 = £715. US tax already paid: 15% × £2,000 = £300. You pay HMRC the difference: £415. In total, 35.75% of the dividend goes in tax, as it would on a UK dividend.
Check yourself
You never filled in a W-8BEN, so the US withheld 30% from your US dividends. What happens to the extra 15% above the treaty rate?
This exercise is in the free account, where we also save your progress.
Create a free accountWhen you need to report dividends to HMRC
- Under the allowance: if all your dividends, UK and foreign, are within the £500 allowance and you have nothing else to report, you do not need a tax return for them.
- Above the allowance: if your dividends are more than your unused Personal Allowance plus the dividend allowance, you must tell HMRC.
- Foreign dividends: UK residents with foreign income usually report it on a Self Assessment return, where you also claim the credit for US tax.
- If you do not file a tax return: tell HMRC by 5 October after the end of the tax year. For smaller amounts you can ask HMRC to collect the tax through your tax code; for larger amounts you register for Self Assessment.
Myth or fact?
“Dividends from an ETF in my stocks and shares ISA have to go on my tax return.”
This exercise is in the free account, where we also save your progress.
Create a free accountWhat would you do?
You hold £40,000 of dividend shares in an ordinary account. They pay about £1,600 a year, and you are a higher rate taxpayer. What do you do?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat you learned
- The first £500 of dividends each tax year is tax-free, and dividends inside an ISA or pension are not taxed at all.
- Above the allowance, dividends are taxed at 10.75%, 35.75% or 39.35%, depending on your income band.
- With a W-8BEN the US withholds 15% on US dividends, and HMRC credits that against your UK tax.
You reached the end
Keep what you learned
With a free account we remember your lessons, bring back the questions you got wrong exactly when you need them and keep your streak.
Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: GOV.UK, Tax on dividends and Tax on foreign income; Budget 2026, Annex A rates and allowances (28 October 2026); the UK-USA Double Taxation Convention, Article 10, on GOV.UK; IRS, NRA withholding and About Form W-8BEN. Rules checked on 29 October 2026; your own situation may differ, so check GOV.UK or ask HMRC or a qualified tax adviser.