Dividend Tax and ISAs 2026/27
Dividends inside an ISA are not taxed and do not use the dividend allowance. Dividends outside an ISA are subject to the £500 allowance and then taxed at 8.75%, 33.75% or 39.35% depending on your income. This guide explains how ISA dividend tax exemption works in 2026/27.
Published by the UK Money Calculators editorial team. Last updated for the 2026/27 tax year.
No dividend tax inside an ISA
Dividends inside a Stocks and Shares ISA are completely exempt from UK income tax. It doesn't matter how large they are, what rate band you're in, or how much you receive — ISA dividends are simply not taxable.
The exemption covers individual company dividends, fund distributions, REIT distributions and interest distributions. Capital gains inside an ISA are also exempt from CGT. None of it needs to be declared on a Self Assessment return.
The ISA allowance: £20,000 per year
The ISA allowance for 2026/27 is £20,000 per person. You can split that across a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA or Lifetime ISA (up to £4,000 into a LISA), but the combined total can't exceed £20,000.
Unused allowance doesn't carry forward. It resets on 6 April. But existing ISA funds — and all the dividends accumulated over previous years — stay sheltered indefinitely. There is no cap on the total pot size.
How the dividend allowance interacts with ISAs
ISA dividends are ignored by the UK tax system entirely. They don't count toward your £500 allowance and don't push you into a higher band. Your £500 remains fully available for anything held outside the ISA.
For investors with large dividend-paying portfolios this matters a lot. A £200,000 portfolio inside an ISA yielding 4% produces £8,000 in dividends — all tax-free. The same portfolio outside an ISA generates a real dividend tax bill, especially for higher and additional-rate taxpayers.
Worked example: ISA vs outside ISA
Scenario: £2,000 of dividends inside a Stocks and Shares ISA and £2,000 of dividends outside the ISA. Taxpayer has a salary of £30,000 (basic-rate taxpayer).
- £2,000 ISA dividends — completely tax-free. No tax owed. The £500 dividend allowance is not used up by these dividends.
- £2,000 outside-ISA dividends — £500 dividend allowance applies. Remaining taxable dividends: £1,500.
- Salary of £30,000 is in the basic-rate band. Dividends fall in the basic-rate band too.
- Dividend tax: £1,500 × 8.75% = £161.25.
| Inside ISA | Outside ISA | |
|---|---|---|
| Dividend income | £2,000 | £2,000 |
| Dividend allowance used | £0 | £500 |
| Taxable dividends | £0 | £1,500 |
| Dividend tax owed | £0 | £161 (at 8.75%) |
If the same taxpayer had a salary of £55,000, dividends outside the ISA would fall in the higher-rate band at 33.75% — tax on the £1,500 would be £536.
Bed and ISA: moving investments into an ISA
If you hold dividend-paying shares outside an ISA, a Bed and ISA is worth considering: sell outside the ISA and immediately repurchase inside. Future dividends and gains on those holdings then become tax-free.
The sale can trigger a CGT liability if the investment has grown, so check that before proceeding. You can move up to £20,000 per year this way. Spouses and civil partners each have their own £20,000 allowance, so a couple can shelter up to £40,000 per year.