Published: June 2026 | Fact-Checked & Audited By: David Vance, CTA FCA (Chartered Tax Advisor & Accountant)
This guide is fully updated for the 2026/27 HMRC tax year. All calculations and tax rules have been audited against official UK legislation.
Many taxpayers assume that Income Tax only applies to their salary or wages. However, any income you earn from savings interest, peer-to-peer lending, or company dividends is also subject to tax. HMRC provides specific allowances—the Personal Savings Allowance (PSA) and the Dividend Allowance—which allow you to earn a certain amount tax-free. However, these allowances are tied directly to your overall income tax band. In this guide, we explain how savings and dividend taxes are calculated and how they interact with your salary for the 2026/27 tax year.
The Personal Savings Allowance (PSA) for Interest
Your Personal Savings Allowance determines how much interest you can earn from your bank accounts, building societies, or corporate bonds completely tax-free. Your PSA threshold depends on your marginal tax rate:
| Tax Band | Total Taxable Income | Personal Savings Allowance | Tax Rate on Excess Interest |
|---|---|---|---|
| Basic Rate | Up to £50,270 | £1,000 | 20% |
| Higher Rate | £50,271 to £125,140 | £500 | 40% |
| Additional Rate | Over £125,140 | £0 | 45% |
How Dividend Tax Works
Dividends are payments made by limited companies to their shareholders. For the 2026/27 tax year, the tax-free **Dividend Allowance is £500**. Any dividend income you receive above £500 is taxed at rates that are lower than standard income tax rates, depending on your tax band:
- Basic Rate Taxpayers: Pay **8.75%** on dividends over the £500 allowance.
- Higher Rate Taxpayers: Pay **33.75%** on dividends over the allowance.
- Additional Rate Taxpayers: Pay **39.35%** on dividends over the allowance.
If you run a limited company and want to calculate the most tax-efficient split between a director’s salary and dividends to minimize tax, use our specialized Salary vs Dividend Split Calculator.
What People Search For: FAQs on Savings & Dividends
1. How much savings interest can I earn tax-free?
Basic rate taxpayers can earn £1,000 in interest tax-free, higher rate taxpayers can earn £500, and additional rate taxpayers get £0. Any interest earned inside a tax-free Cash ISA or Stocks & Shares ISA does not count towards these limits.
2. What is the Dividend Allowance for 2026/27?
The tax-free Dividend Allowance is £500 for the 2026/27 tax year. This allowance applies to anyone receiving dividend payments from UK or overseas companies, regardless of their other income.
3. How is tax collected on bank interest?
Banks report your interest earnings directly to HMRC at the end of each tax year. If you are employed under PAYE, HMRC will adjust your tax code for the following year to collect the tax due automatically.
4. Do dividends count towards my Personal Allowance?
Yes, dividend income counts as part of your total taxable income. While the first £500 is tax-free, the total amount is added to your salary to determine your tax bracket (Basic, Higher, or Additional).
5. Can I use an ISA to avoid tax on dividends?
Yes, any dividends or capital gains earned on shares held inside an ISA are completely exempt from UK tax. ISA investments do not need to be declared on your Self-Assessment tax return.
6. What are the dividend tax rates for 2026/27?
The dividend tax rates are 8.75% for basic rate, 33.75% for higher rate, and 39.35% for additional rate earners. These rates apply to all dividends exceeding the £500 annual allowance.
7. How do I declare dividend income to HMRC?
If your dividend income is between £500 and £10,000, you can ask HMRC to adjust your PAYE tax code. If you earn more than £10,000 in dividends, you must register for Self-Assessment and file a tax return.
8. Does savings interest affect my tax bracket?
Yes, interest income is added to your overall taxable income. Even if your salary is below the higher rate threshold, a large savings interest payout can push you into the higher rate band, reducing your PSA allowance.
9. Is peer-to-peer lending interest covered by the PSA?
Yes, interest earned from peer-to-peer (P2P) lending platforms is treated as savings interest and qualifies for your Personal Savings Allowance.
10. Can married couples split dividends to save tax?
Yes, if you hold shares jointly or transfer shares to a spouse, you can utilize both of your £500 allowances and potentially pay lower dividend tax rates if one spouse is in a lower tax bracket.