For the 2026/27 UK tax year, a basic rate taxpayer receives £2,000 of dividend income during the year and has no other dividend income. Under HMRC's dividend tax rules, how is this £2,000 taxed?
- All £2,000 is taxed at the basic rate of 20%, because dividends are taxed in exactly the same way as employment income
- All £2,000 is exempt from tax, because dividend income up to £2,000 a year has always been tax-free
- The first £500 is covered by the tax-free dividend allowance, and the remaining £1,500 is taxed at the 10.75% ordinary dividend rate
- The first £1,000 is covered by the tax-free dividend allowance, and the remaining £1,000 is taxed at the 8.75% ordinary dividend rate
Why C? And why not the others?
Correct answer: C. The first £500 is covered by the tax-free dividend allowance, and the remaining £1,500 is taxed at the 10.75% ordinary dividend rate
For 2026/27 the tax-free dividend allowance is £500, and dividend income above it for a basic rate taxpayer is taxed at the ordinary dividend rate of 10.75%, so the £2,000 in this scenario has £500 covered by the allowance and the remaining £1,500 taxed at 10.75%, matching the option describing exactly that split and rate. The option treating dividends like employment income is wrong because dividends are taxed under their own separate allowance and rate structure, never at the 20% employment basic rate. The option claiming a permanent £2,000 tax-free amount is wrong because the dividend allowance has been reduced over several years and now sits at £500, not £2,000. The option describing a £1,000 allowance and an 8.75% rate is wrong because those were the figures that applied in earlier tax years; from 6 April 2026 the allowance is £500 and the ordinary rate rose to 10.75%.
Source: GOV.UK: Tax on dividends — dividend allowance and rates for 2026/27; GOV.UK: Changes to tax rates for property, savings and dividend income