Dividend Income Calculator

Dividend income is either counted directly, as the number of shares held multiplied by the dividend per share, or estimated from the portfolio's yield. A £100,000 portfolio yielding 4% throws off £4,000 a year. Yields differ enormously by what you hold. The FTSE 100 as a whole was forecast to yield about 3.4% in 2026 (AJ Bell Dividend Dashboard, June 2026), growth stocks often pay under 1%, and some high-yield investment trusts more than 6%. A yield figure is only ever a snapshot, since it moves with both the share price and the company's payout decisions.

The dividend allowance for 2026/27 is £500, so the first £500 of dividend income is tax-free whatever band you are in. It has shrunk steadily, from £2,000 in 2022/23 to £1,000 in 2023/24 and £500 from 2024/25. Above the allowance, dividends are taxed at 10.75% in the basic band, 35.75% in the higher band and 39.35% in the additional band. Those rates sit below the equivalent income tax rates because company profits have already been through corporation tax before anything is distributed.

Because dividends sit on top of your other income, the band they fall into depends on what you earn first. On a £45,000 salary with £6,000 of dividends, the salary leaves £5,270 of the basic rate band, up to £50,270. The first £500 of dividends is taxed at 0% but still uses that band, so £4,770 is taxed at 10.75% and the last £730 at 35.75%, a bill of £773.75 in all. Dividends paid inside an ISA or a pension are outside all of this. They are tax-free, they do not use up the allowance, and they do not push other income into a higher band.

Company directors run the same arithmetic from the other side. A £12,570 salary uses the Personal Allowance with no income tax or employee NI, but employer NI at 15% starts at £5,000, so it costs the company £1,135.50, and a company whose only employee is the director cannot claim the Employment Allowance. Above that, salary carries 8% employee and 15% employer NI, a combined 23% that dividends avoid, though dividends come out of profit that has already paid corporation tax. On £80,000 of profit before the director's pay, the £12,570 salary and £1,135.50 of employer NI leave £66,294.50 taxable, corporation tax with marginal relief takes £13,818.04, and paying the remaining £52,476.46 as dividends costs £9,281.58 in dividend tax, leaving about £55,760 in hand. Taken entirely as salary, the £80,000 funds £70,217 of pay plus £9,783 of employer NI, and income tax and NI then leave about £51,280, some £4,480 less.

Dividends from companies outside the UK are still taxable here if you are UK resident, with double tax relief to stop the same income being taxed twice. Take a US dividend worth £1,000 once converted to sterling: 15% withholding under the treaty takes £150 at source and £850 arrives. UK tax is charged on the gross £1,000, so a basic-rate taxpayer who has used the dividend allowance owes £107.50, which the £150 credit covers in full. The other £42.50 is lost, because HMRC does not repay excess foreign tax or let it be carried forward. A higher-rate taxpayer owes £357.50 and pays £207.50 after the credit. Claiming the credit means declaring the dividend on a Self Assessment return.

Inside a Stocks and Shares ISA dividends are free of tax permanently, which is why dividend investing and the £20,000 annual allowance go together so naturally. A £50,000 ISA yielding 4%, a little above the FTSE 100 forecast of about 3.4% for 2026, produces £2,000 a year with nothing to declare. Hold the same £50k outside a wrapper and only £500 escapes tax, leaving £1,500 charged at somewhere between 10.75% and 39.35% depending on your band.

The allowance works on a use-it-or-lose-it basis, since nothing carries forward to the next tax year. Couples can make more of it by moving income-generating assets to the lower-earning spouse, a transfer that triggers no capital gains tax and turns the dividends into their income at their rate. Interest-paying bond funds are better held in a pension or an ISA than in a taxable account. One trap catches people who reinvest automatically outside an ISA: reinvested dividends are still taxable in the year they are paid even though no cash reaches you, and each DRIP purchase adds new shares at a new cost, so keep the records for capital gains tax.