Dividends tax for employees with shares

If you own shares outside an ISA or pension, the first £500 of dividends you receive each tax year is tax-free. Above that, dividends in 2026/27 are taxed at 10.75 per cent if they fall in the basic-rate band, 35.75 per cent in the higher-rate band and 39.35 per cent in the additional-rate band. The basic and higher rates went up by two percentage points this year, from 8.75 and 33.75 per cent, so the same dividends now cost more tax than they did in 2025/26.

Who this affects in the public sector

Few public sector employers pay staff in shares. Employees who own them have usually picked them up elsewhere: from an earlier private sector job with a share plan, a partner’s or relative’s gift or inheritance, privatisation shares, or an investment account opened directly. Employees of private firms delivering public services, such as some outsourced facilities or IT contracts, may also hold shares through a company plan.

Whatever the source, the tax rules are the same.

The rates and allowance

Dividend income falls in	2025/26 rate	2026/27 rate
Dividend allowance (first £500)	0%	0%
Basic-rate band	8.75%	10.75%
Higher-rate band	33.75%	35.75%
Additional-rate band	39.35%	39.35%

Dividends are treated as the top slice of your income. Payroll income such as your salary uses up your personal allowance and bands first, then savings interest, then dividends. So the rate on your dividends depends on how much of your basic-rate band your salary has already used.

The £500 allowance is not a separate band. Dividends covered by it still use up band space, which can push other dividends into a higher band.

Worked examples

Say you are a basic-rate taxpayer in an NHS or school job, well below the higher-rate threshold, and receive £1,500 of dividends. The first £500 is tax-free. The other £1,000 is taxed at 10.75 per cent, so you owe £107.50. In 2025/26 the same dividends would have cost £87.50.

Now say you are a higher-rate taxpayer and receive the same £1,500. The tax is 35.75 per cent of £1,000, which is £357.50.

The awkward case is when you are just below the higher-rate threshold. Suppose your taxable income after your pension contribution leaves you £500 below £50,270, and you receive £2,000 of dividends. The £500 allowance uses up the remaining basic-rate band, so the other £1,500 falls into the higher-rate band and is taxed at 35.75 per cent. The tax is £536.25.

How the tax is paid

Dividends are paid without any tax taken off. HMRC needs to know about them so it can collect what is due.

If your dividends are modest and you do not already file a tax return, you can tell HMRC and ask for the tax to be collected through your tax code. HMRC will then reduce your allowance on your code for the following year, and you pay the tax through payroll. Above a certain level of dividend income you must file a Self Assessment return instead; gov.uk sets out the threshold. If you already file a return, you include dividends there.

The online return for 2026/27 is due by 31 January 2028. If you need to file for the first time, you must register by 5 October after the end of the tax year. Do employees need to do Self Assessment? explains who needs to file.

Dividends you do not report, but which take you over the allowance, will normally be found by HMRC later, with interest and possibly penalties added.

Knock-on effects

Dividends count towards your adjusted net income. That can matter more than the dividend tax itself if your income is near £60,000, where the High Income Child Benefit Charge starts, or near £100,000, where the personal allowance begins to shrink and Tax-Free Childcare and funded childcare hours stop. High Income Child Benefit Charge shows how adjusted net income is calculated.

Selling shares is a separate matter. Any profit on a sale may be liable to Capital Gains Tax, which has its own allowance and rates.

Holding shares tax-free

Shares and funds held in a stocks and shares ISA are free of dividend tax and Capital Gains Tax. Investments inside a pension are also sheltered. Whether moving existing shares into an ISA makes sense depends on your circumstances; a regulated financial adviser can help, and MoneyHelper offers free guidance. Interest on cash savings has its own allowance, covered in tax on savings interest.