The dividend allowance is the amount of dividend income a UK taxpayer can receive each tax year taxed at 0%. For 2025/26 it is GBP 500. It is not a true exemption: dividends inside the allowance are taxed at zero but still count toward your total income and use up part of your tax band, which can push other income into a higher band.
Above the allowance, dividends are taxed by band: 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate). Dividends held inside an ISA are tax-free and ignored entirely.
Example. Suppose you have a GBP 12,570 salary (fully covered by the personal allowance) plus GBP 3,000 in dividends. The first GBP 500 falls in the dividend allowance and is taxed at 0%. The remaining GBP 2,500 is taxed at the basic rate of 8.75%, giving GBP 218.75 of dividend tax. If your other income already used the basic-rate band, that GBP 2,500 would instead be taxed at 33.75%.
Model your own figures with the UK dividend tax calculator. See also the personal allowance and how the income tax bands interact with dividend rates.