Dividend and savings tax

Interest and dividends have their own rates and their own allowances. Both have shrunk.

Income from savings and from shares is taxed differently from earnings, at different rates, with separate allowances. Both allowances have been cut substantially in recent years, which has pulled a lot of ordinary savers and small investors into tax for the first time.

Savings interest

Interest from bank and building society accounts, and from most bonds, is taxed as savings income.

The Personal Savings Allowance shelters the first slice:

£1,000 for basic-rate taxpayers

£500 for higher-rate taxpayers

£0 for additional-rate taxpayers

Note the cliff edge. Crossing from higher to additional rate loses the allowance entirely, not gradually.

The starting rate for savings is a separate and widely missed relief. If your non-savings income is low, up to £5,000 of savings interest can be taxed at 0% on top of the Personal Savings Allowance. It reduces as non-savings income rises above the Personal Allowance and disappears once that income reaches around £17,570.

This matters enormously for people with low earned income and significant savings — some retirees, people between jobs, and anyone taking a career break. Combined with the Personal Allowance and Personal Savings Allowance, it can shelter a considerable amount of interest from any tax at all.

Why this changed. When rates were near zero, £1,000 of allowance covered a very large balance. With rates where they've been since 2022, a much more modest sum generates £1,000 of interest, and people who never previously had a tax liability on savings suddenly do.

Tax is not deducted at source. Banks stopped doing that in 2016. If you owe tax on interest, HMRC generally collects it by adjusting your tax code, using information reported by the banks. It's often a year behind, and the adjustment can appear without explanation.

Dividends

Dividends from shares and equity funds held outside ISAs and pensions.

The dividend allowance is £500 for 2026/27 — down from £5,000 when it was introduced in 2016. That's a ninety percent reduction, and it's the reason so many small investors now have dividend tax to pay.

Above the allowance, rates are:

8.75% for basic-rate taxpayers

33.75% for higher-rate taxpayers

39.35% for additional-rate taxpayers

Dividends sit on top of your other income when working out which rate applies, so the band depends on your total income.

The obvious answer

Both allowances become largely irrelevant if the assets sit inside an ISA or a pension. No tax on interest, no tax on dividends, nothing to report.

The ISA allowance is £20,000 a year. For most people with savings and investments outside a wrapper, moving them inside over successive years — bed and ISA for investments, straightforward transfers for cash — removes the problem permanently rather than managing it annually.

Other things worth knowing

Use both spouses' allowances. Moving savings or shares into the name of a lower-earning spouse can use their allowances and their lower rates. Transfers between spouses are free of capital gains tax and inheritance tax.

Joint accounts split interest 50/50 for tax purposes by default, regardless of who contributed.

Company directors taking dividends instead of salary need to plan around the shrunken allowance and the rates above. The calculation that made dividend extraction obviously efficient has narrowed considerably.

Fixed-term accounts may pay all the interest in the year the term ends, which can push a large sum into a single tax year and produce a bigger bill than the same interest spread evenly.

Reporting. If you have a small amount of tax due, HMRC usually collects it through your tax code. Larger amounts, or dividend income above certain levels, may require Self Assessment.

This article is for general education only and isn't personal advice. Figures are for 2026/27.