He is Scotland's most-capped player with 102 caps. He began his career with Scottish champions Celtic, making his debut a year after Jock Stein's team became the first British side to win the European Cup in 1967. He won four Scottish titles and four Scottish Cup before moving to Liverpool in 1977.
"I thought it was a tax bill," Dalglish told the BBC. "For the family, it's a huge honour.
It won't make any difference to me, I'll just maybe need to change my passport! But just because we're a wee bit embarrassed about it doesn't underestimate how pleased and proud we are to have received it.
"I hope everyone who came into our lives enjoys it as well."
Dalglish scored the winning goal in the 1978 European final and helped the Anfield club emulate that feat in 1981 and 1984.
Away from his stunning achievements in football, he was also recognised for his work in supporting the victims of the Hillsborough stadium disaster.
Kenny Dalglish is a Celtic and Liverpool icon.
Image credit: PA Sport
He has also helped to raise over £10m to improve cancer care on Merseyside.
“Obviously it was for others with more education and knowledge than myself to decide whether or not I deserved a knighthood, and it goes without saying that I am hugely grateful to them for the decision that they have made,” Dalglish said on Liverpool's website.
“All I can say from my own point of view is that I am definitely no more deserving of an accolade like this than Jock Stein, Bill Shankly and Bob Paisley were.
I am just fortunate enough to be in the right place at the right time and I would like to dedicate this honour to them because without the standards that they set at Glasgow Celtic and Liverpool, individuals like myself would not have been able to thrive as much as we did.