The revenue or profit raised by UK firms of all sizes is distributed as dividends among shareholders. Allocation of dividends is measurable according to the percentage of shares every shareholder has in the company, i.e. if the individual owns half of the company’s shares, 50 per cent of each dividend payout would be distributed.

On 6 April 2016, the 10 per cent tax credit on dividends was eliminated and a new tax-free “dividend allowance” was introduced for all in its place which ensures that the first £ 2,000 of dividends you earn are tax-free.

Dividend allowances are the tax-free exemption given up to a specific amount.Now dividends are taxed at a flat rate as per the tax rate band of an individual.

Any dividends earned over the dividend limit (currently £2,000) and any cumulative unused personal allowance (now £11,850) would be taxable at different rates. Dividends above £2,000 earned would be taxable at the following rates:

  • Residents who fall within the basic tax rate band, 7.5% on dividend income
  • Residents who fall within the higher rate band, 32.5% on dividend income
  • Residents who fall within the extra rate band, 38.1 % on dividend income

A £2,000 dividend allowance is given, which ensures that it is not taxable for the first £2,000 of dividends. However, the gross income amount on which an individual is taxable is not eliminated by this allowance.

For example

Jack has a salary income of £7000 and £12,500 as a dividend income from shares and £11,000 as a personal allowance.

Salary                                                                        £7000

Dividends                                                                 £12,500


Personal allowance                                               £(11,000) 


Dividend allowance                                              £(2,000) 

Income taxed at dividend basic rate of 7.5%   £6,500 

The total dividend Tax payable is £6,500 x 7.5% = £487.50

How does the dividend allowance for 2020/21 and 2019/20 works?

It is explained with the help of the following table:

Band2020/212019/20Tax Rate
BasicBelow £37,500Below £37,5007.5%
Higher£37,501 – £150,000£37,501 – £150,00032.5%
Additional£150,000 and above£150,000 and above38.1%

After the other revenue sources have already taxable, such as your salary and additional related revenue, dividends are taxed (from savings or investments). So, once your allowance and other income sources have added together, your dividends will fall into one or more of the tax bands mentioned above.