Dividend Tax vs Capital Gains Tax, Which Is Lower?

Dividend income and capital gains are taxed differently. For 2026/27, basic-rate dividends (10.75%) are taxed less than basic-rate gains (18%), but at higher rate CGT at 24% beats dividend tax at 35.75%. Here is the arithmetic.

Last updated: May 2026 · 6 min read · Reviewed by the UKDividendTaxCalculator team. Reviewed against official UK guidance. Methodology

The Fundamental Difference

Dividend income and capital gains are fundamentally different in how they arise. Dividends are income paid by a company out of profits, they are declared by the board and paid to shareholders. Capital gains arise when you sell an asset for more than you paid for it. You do not usually get to choose which type of return you receive, a company either pays dividends or it does not, and the gain on a sale is whatever the market determines.

The distinction matters for tax because HMRC treats them entirely differently. Dividend income is subject to dividend tax rates (10.75%, 35.75%, 39.35%). Capital gains are subject to CGT at 18% (within the basic-rate band) or 24% (above it) — the main rates for shares and residential property since 30 October 2024 (gains qualifying for Business Asset Disposal Relief or Investors' Relief are taxed at 18% whatever your income, and carried interest is taxed as income from 6 April 2026) — after a £3,000 annual exempt amount. Dividends get only a £500 allowance. At higher income levels gains are taxed more lightly; at basic rate the dividend rate is actually lower.

Where You Can Choose

There are situations where investors can influence whether their return comes as income or capital. Accumulation funds reinvest dividends internally rather than distributing them, so the investor's return accrues as capital growth rather than income. This is sometimes called 'rolling up' income, it can convert what would have been taxable dividend income into a future capital gain instead. Whether this is advantageous depends on your income level and the tax year in which you ultimately sell.

Company directors have a genuine choice between salary and dividends (income) or retaining profits in the company for future capital growth (potentially a capital gain on sale). Pension contributions made by the company create a different outcome again. The optimal route requires modelling across multiple tax types simultaneously.

The Arithmetic at Different Income Levels

For a basic-rate taxpayer: dividend tax is 10.75% and the main CGT rate is 18% on shares and most other assets. Rate for rate, dividends are now cheaper, but the allowances pull the other way: £3,000 of gains a year are tax-free against only £500 of dividends. On a £5,000 return, dividends cost £483.75 ((£5,000 − £500) × 10.75%) and a gain costs £360 ((£5,000 − £3,000) × 18%); on a £10,000 return, dividends cost £1,021.25 and a gain £1,260, so above roughly £6,700 a year the dividend route is cheaper for a basic-rate taxpayer.

For a higher-rate taxpayer: dividend tax is 35.75% and CGT is 24%. The gap is 11.75 percentage points, a very significant difference. Ignoring allowances, a £10,000 return from dividends costs £3,575 in tax; the same £10,000 as a capital gain costs £2,400. After the £500 dividend allowance and £3,000 annual exempt amount it is £3,396.25 against £1,680. This is why higher-rate taxpayers with a choice between accumulation and income funds, or between retained company profits and dividends, often prefer the capital gains route.

ISAs and the Answer to Which Is Lower

Inside an ISA, the answer is zero for both. Dividends received from shares held in a Stocks and Shares ISA are completely free from dividend tax. Capital gains on ISA holdings are completely free from CGT. The annual ISA subscription limit for 2026/27 is £20,000 per person. For any investor with holdings inside an ISA, the comparison between dividend tax and CGT is irrelevant, both rates are zero.

This is why long-term investors prioritise sheltering high-return investments inside ISAs. Whether those investments generate returns as dividends or capital gains, the tax treatment is identical, and identically attractive. The comparison between dividend tax and CGT only becomes relevant for the portion of a portfolio held outside an ISA.