Key takeaways
- UK income is taxed in a fixed order — everything else first, savings interest next, dividends on top. ITA07/S16 sets that order, and it decides every rate below.
- For 2026 to 2027 the dividend allowance is £500 and the dividend rates are 10.75%, 35.75% and 39.35%. The first two rose by 2 points on 6 April 2026.
- On £48,000 of salary, £1,150 of interest and £3,000 of dividends the bill is £7,954.75, and the next £100 of salary is taxed at 45%.
- A pensioner on £17,000 with £6,000 of interest pays basic rate throughout and faces a 40% marginal rate, because the starting rate for savings tapers pound for pound.
- At the higher-rate threshold £1 of extra salary can cost £100.40, because the personal savings allowance halves from £1,000 to £500 the moment anything is charged at 40%.
Salary is taxed first, interest second, dividends last
You want to know the rate your dividends and savings interest actually attract. The published answer is a table of rates. The working answer is an order, and the order is what produces the rates nobody expects.
HMRC's Savings and Investment Manual says it directly. "Savings and dividend income is taxed as the highest part of a person's total income, in computing a person's overall tax liability. ITA07/S16 sets out the following rules." The manual then describes the stack: "the first slice of a person's income comprises earnings, pensions, taxable social security payments trading profits and income from property. The next slice is savings income, and dividend income is the top slice."
So your salary fills the bands from the bottom. Interest sits on whatever is left. Dividends sit on top of that. A pay rise isn't taxed on its own — it shoves your interest and your dividends up behind it. Every strange marginal rate below is a version of that single fact.
Everything here is the 2026 to 2027 tax year, which GOV.UK confirms "is from 6 April 2026 to 5 April 2027", at the rates for England, Wales and Northern Ireland. Scotland differs in a way that matters, and that comes near the end.
The allowances and rates that do the work, 2026 to 2027
- Personal Allowance, £12,570. It falls "by £1 for every £2 that your adjusted net income is above £100,000", and hits zero at £125,140.
- Income Tax bands. 20% on the first £37,700 of income after allowances, 40% from there to £125,140, and 45% above it. The higher rate starts at £50,270 of gross income on a full Personal Allowance.
- Starting rate for savings, £5,000 at 0%. "Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1", and it is gone once other income reaches £17,570.
- Personal savings allowance. £1,000 at the basic rate, £500 at the higher rate, £0 at the additional rate.
- Dividend allowance, £500, then 10.75%, 35.75% and 39.35%.
Two of those dividend rates are new. HMRC's table shows 8.75% and 33.75% for 2025 to 2026 against 10.75% and 35.75% now — a rise of 2 points on each, with the additional rate unchanged at 39.35%. Any sum you did last year is out by that much.
Every allowance here is a zero-rate band, not a deduction
This is where most arithmetic quietly goes wrong. An allowance sounds like something subtracted from your income. None of these are.
HMRC's policy paper on the personal savings allowance was blunt about it. The legislation created "a new 0% rate (the 'savings nil rate')" from 6 April 2016, and stated that "Income that's within an individual's savings allowance will still count towards their basic or higher rate limits and may affect the level of savings allowance they are entitled to, as well as the rate of tax that is due on any savings income they receive in excess of this allowance."
The dividend allowance is built the same way. HMRC's manual is explicit: "In fact the 'allowance' is a 0% tax rate inserted into ITA07/S8, as S8 (A1), properly called the 'dividend nil rate'."
So the allowance doesn't shrink your income. It occupies band. In the example below, treating the £500 dividend allowance as a deduction gives a dividend tax bill of £613.75. Doing it properly gives £738.75. The £125 gap is £500 taxed at the 25-point step between the two dividend rates.
A worked example: £48,000 of salary, £1,150 of interest, £3,000 of dividends
Total income is £52,150. Stacked in the statutory order, it looks like this.
| Slice | Amount | Rate | Tax |
|---|---|---|---|
| Salary covered by the Personal Allowance | £12,570 | 0% | £0 |
| Salary in the basic rate band | £35,430 | 20% | £7,086 |
| Interest in the personal savings allowance | £500 | 0% | £0 |
| Interest in the basic rate band | £650 | 20% | £130 |
| Dividends in the dividend allowance | £500 | 0% | £0 |
| Dividends in the basic rate band | £620 | 10.75% | £66.65 |
| Dividends in the higher rate band | £1,880 | 35.75% | £672.10 |
| Total | £52,150 | £7,954.75 |
Note what the allowances did. The £500 of interest at 0% and the £500 of dividend at 0% each used up £500 of basic rate band on the way through. Without that, £1,000 more of the dividend would have been taxed at 10.75% instead of 35.75%.
The next £100 of that salary is taxed at 45%
This person is a basic-rate taxpayer on their pay. Taxable income of £39,580 still crosses £37,700, so £1,880 of dividend already sits above the line.
Add £100 of salary. The salary itself is taxed at 20%, costing £20. It also takes £100 of basic rate band away from the dividends behind it, and that £100 of dividend moves from 10.75% to 35.75%. That is another £25. Extra tax: £45 on £100.
A 45% marginal rate, on someone earning £48,000. It has nothing to do with the 45% additional rate — the match is a coincidence of arithmetic. £100 of extra interest costs the same £45, for the same reason. £100 of extra dividend costs only £35.75, because dividends are already on top and displace nothing.
A pensioner on £17,000 pays basic rate and still faces 40%
Now take £17,000 of pension income and £6,000 of interest, with no dividends.
The Personal Allowance covers £12,570 of the pension, leaving £4,430 taxed at 20% — that is £886. The starting rate for savings begins at £5,000 but drops £1 for every £1 of other income above the Personal Allowance, so £4,430 of it has gone. That leaves £570 of interest at 0%. The £1,000 personal savings allowance covers the next slice. The remaining £4,430 of interest is taxed at 20%, another £886. Total tax: £1,772.
Add £1 of pension. It costs 20p itself, and it knocks £1 out of the starting rate band, where that pound was at 0% and is now at 20%. The extra pound costs 40p. A basic-rate taxpayer, facing a 40% marginal rate, all the way from £12,570 of other income up to the £17,570 where the starting rate expires — provided there is enough interest that the personal savings allowance is already spent.
At the higher-rate threshold, £1 of salary can cost £100.40
The personal savings allowance does not taper. It halves.
Someone with £49,270 of salary and £1,000 of interest has taxable income of exactly £37,700, the top of the basic rate band. Nothing is charged at 40%, so the allowance is the full £1,000, all the interest is taxed at 0%, and the bill is £7,340.
Add £1 of salary. One pound now sits above the basic rate limit. HMRC counts income as higher-rate income if it is charged at the higher rate "or would be but for the operation of this new savings nil rate or the dividend nil rate" — so that pound qualifies, and the allowance drops to £500. Interest of £500 that was at 0% is now at 20%, which is £100. Add 20p on the salary and 20p on the top pound of interest, and the bill is £7,440.40.
That is £100.40 of extra tax for £1 of extra pay. It isn't a taper, it's a step, and it lands on any household crossing that line with £1,000 or more of taxable interest behind it.
Above £100,000, two more steps appear
The Personal Allowance falls by £1 for every £2 of income above £100,000. On salary that gives the familiar result: £100 more pay removes £50 of allowance, so £150 is taxed at 40%, and the marginal rate is 60%.
Dividends do something less familiar. Take £105,000 of salary and £4,000 of dividends. The allowance is down to £8,070 and the bill is £32,483.25. The next £100 of dividend costs £55.75 — £35.75 on the dividend itself, plus £20 because the £50 of lost Personal Allowance pushes £50 of salary into the 40% band. Both salary and dividend carry the same 20-point surcharge inside the taper.
The second step is at £125,140, where the personal savings allowance goes to £0 for anyone with additional-rate income. Someone on £124,640 of salary with £500 of interest pays £42,316, and the interest is covered. Move the salary to £125,140 and the bill is £42,741. That is £425 more for £500 more pay, an 85% marginal rate: £200 of ordinary 40% tax, plus £225 of interest that just lost its allowance and landed at 45%.
The objection: HMRC expected 95% of taxpayers to owe nothing on savings
The strongest counter to all of this is that it is a minority sport. HMRC's impact note for the personal savings allowance, published in December 2015, said "It's anticipated that around 95% of taxpayers will not have any tax to pay on their savings income", leaving around 1.4 million people paying anything at all. Hold the same assets in an ISA and none of it reaches you: GOV.UK states that "You do not pay tax on dividends from shares in an ISA", and HMRC's manual lists ISA income among the income "ignored for income tax purposes".
That objection is fair, and it is dated. The 95% figure was an estimate made in 2015 for a regime starting in April 2016, against dividend rates that HMRC's own table shows rising again on 6 April 2026. The same table shows the Personal Allowance at £12,570 and the basic rate band at £37,700 in each of the four tax years from 2023 to 2024 through to 2026 to 2027. The steps have not moved in four years. Whether that matters to you depends on whether your income has.
Where this arithmetic breaks down
Three limitations, and they are real ones.
Scotland is the first. Scottish taxpayers pay Scottish rates on pay and pensions — 42% from £43,663 in 2026 to 2027 — but HMRC's PAYE manual states that "Savings and dividend income is still taxed using the England and N.Ireland tax rate and rate bands regardless of the individual's residential status". Two band structures, one stack of income. Every step above sits somewhere else for a Scottish taxpayer, and finding it needs both tables.
Coverage is the second. Nothing here covers pension contributions or Gift Aid, both of which extend the basic rate band; the High Income Child Benefit Charge; trusts; non-residents; or life insurance gains, which HMRC says are "taxed as the very highest slice of income, over savings and dividend income" and so sit above even dividends. Nor does it cover funds that reinvest their income rather than paying it out, where the taxable amount is not the cash you received.
Source drift is the third. HMRC's own manual page on these rates still describes the position in a tax year that ended in 2020, and tells readers "The gov.uk website gives up to date dividend income tax rates and allowances". A manual is authoritative on mechanism and unreliable on rates, which is why every rate here comes from the current GOV.UK tables instead. And these are marginal rates on the next pound, not average ones: the household paying £7,954.75 on £52,150 is paying about 15.3% overall.
What would change these numbers
A Budget would, entirely. The dividend rates moved on 6 April 2026 and the thresholds have sat still since 2023 to 2024. Either can change at any fiscal event, and every step moves with them.
Short of that, three things change the picture for a given household. Moving interest or dividends inside an ISA takes them out of the stack, which makes these cliff edges a taxable-account problem rather than a portfolio one — and where emergency cash sits decides how much taxable interest gets generated in the first place. Anything that extends your basic rate band moves the £37,700 line, and every step behind it. And composition matters more than the total: two people with £52,150 of income owe very different amounts depending on how much of it arrives as dividend.
Tax is also the last layer, not the only one. FX charges, platform fees and withholding tax take their share before any of this applies, and fund fees compound across a working life whatever your marginal rate turns out to be. What none of the tables tell you is which step you are standing next to. That is the only part specific to you, and it is the part worth working out.