Dividends and the £100,000 Trap: Losing Your Personal Allowance
Between £100,000 and £125,140 of income the Personal Allowance is withdrawn, and dividends count towards that income just like salary. The result is an effective rate on extra dividends well above the 35.75% headline rate.
Your Personal Allowance falls by £1 for every £2 of adjusted net income above £100,000, and is zero at £125,140.1 Adjusted net income includes dividends.2 So in that range each extra £1 of dividends costs 35.75% plus the tax on 50p of income that loses its allowance. Example: with a £90,000 salary, taking £30,000 of dividends instead of £10,000 adds £11,150 of tax in 2026/27, an effective 55.75%. Pension contributions reduce adjusted net income (personal ones grossed up),2 and a £20,000 gross contribution brings the allowance back, saving £8,000 here on top of the 20% added to the pension.
- Taper: £1 of Personal Allowance lost for every £2 of adjusted net income over £100,000; nil at £125,140.1
- Adjusted net income includes dividends, salary, savings interest and other taxable income.2
- Personal pension contributions (relief at source) and Gift Aid reduce it by the grossed-up amount.2
- Relief on personal contributions is limited to 100% of relevant UK earnings (or £3,600); dividends are not relevant earnings.6
- Dividend rates 2026/27: 10.75% / 35.75% / 39.35%, £500 allowance.
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Why dividends trigger the taper
GOV.UK's adjusted net income starts from your total taxable income, which lists dividends from company shares alongside pay, pensions, savings interest and rent.2 There is no separate treatment: £10,000 of dividends pushes you over £100,000 exactly as £10,000 of salary would.
Because dividends are taxed as the top slice of income, losing the allowance usually hits your other income: £1 of salary or pension that was tax-free becomes taxable for every £2 over the threshold.
Worked example: £90,000 salary, £10,000 or £30,000 of dividends
Priya earns a £90,000 salary and receives dividends from a share portfolio. Compare £10,000 of dividends (adjusted net income £100,000) with £30,000 (£120,000) in 2026/27.
| £10,000 of dividends: income tax on salary | £23,432.00 |
| £10,000 of dividends: dividend tax (£9,500 × 35.75%) | £3,396.25 |
| Total at £100,000 | £26,828.25 |
| £30,000 of dividends: Personal Allowance left | £2,570.00 |
| £30,000 of dividends: income tax on salary | £27,432.00 |
| £30,000 of dividends: dividend tax (£29,500 × 35.75%) | £10,546.25 |
| Total at £120,000 | £37,978.25 |
| Extra tax on the extra £20,000 of dividends | £11,150.00 (55.75%) |
The extra £11,150 is £7,150 of dividend tax (35.75% of £20,000) plus £4,000 because £10,000 of salary loses its allowance and is taxed at 40%.
How a pension contribution restores the allowance
If Priya pays £16,000 into a personal pension, the provider adds 20% basic-rate relief, making £20,000.3 Her adjusted net income falls by the grossed-up £20,000, back to £100,000, so the full allowance returns.2 She can also claim the extra relief GOV.UK describes for higher-rate taxpayers through Self Assessment.3 Her £90,000 salary is relevant UK earnings, so the contribution is within the 100% of earnings limit.6
| Tax with £30,000 dividends, no pension | £37,978.25 |
| Tax with a £20,000 gross pension contribution | £29,978.25 |
| Tax saved through Self Assessment | £8,000.00 |
| Cost: £16,000 paid less £8,000 saved | £8,000.00 |
| Added to the pension | £20,000.00 |
The £8,000 is £4,000 of higher-rate relief (an extra 20% of £20,000) plus £4,000 from the restored £10,000 allowance at 40%. The pension annual allowance (normally £60,000) still applies.
Other ways to manage it
- Hold shares in a Stocks and Shares ISA: ISA dividends are tax-free and do not count towards adjusted net income.
- Gift Aid donations reduce adjusted net income by the grossed-up amount, like personal pension contributions.2
- If you run your own company, time dividends across tax years so income stays under £100,000 in each year where possible.
- Dividends cannot support personal pension contributions: relief is limited to 100% of relevant UK earnings (such as pay and trading profits) or £3,600, and HMRC's list of relevant earnings does not include dividends.6
Check your own numbers
Enter salary, dividends and pension contributions for 2026/27.
Open dividend tax calculatorRelated pages
Sources & references
Every headline figure in this guide is drawn from the official HMRC and GOV.UK sources below and reflects the confirmed 2026/27 rates. Each link opens the relevant official page in a new tab.
- Income Tax rates and Personal Allowances (income over £100,000) ↗ https://www.gov.uk/income-tax-rates
- Adjusted net income ↗ https://www.gov.uk/guidance/adjusted-net-income
- Tax on your private pension contributions: tax relief ↗ https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief
- Tax on dividends ↗ https://www.gov.uk/tax-on-dividends
- Individual Savings Accounts (ISAs) ↗ https://www.gov.uk/individual-savings-accounts
- HMRC Pensions Tax Manual PTM044100: tax relief for members, relevant UK earnings ↗ https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100
Frequently asked questions
Do dividends count towards the £100,000 limit?
What is the effective tax rate on dividends between £100,000 and £125,140?
Can pension contributions get my Personal Allowance back?
Do ISA dividends count towards adjusted net income?
At what income is the Personal Allowance zero?
Disclaimer: General information about UK tax for 2026/27, not personal tax advice. Figures assume England, Wales or Northern Ireland income tax bands unless stated.