The number of people expected to pay dividend tax in the 2024/25 tax year has almost doubled since 2021/22, with successive cuts to the dividend allowance hitting investors.
A Freedom of Information request from AJ Bell found that the HM Revenue & Customs expects to rake in almost £18 billion in dividend tax this year, with just under 3.6 million expected to pay the tax.
The tax-free dividend allowance was cut twice in April 2023 and April 2024 to £1,000 and £500 respectively, leading to a notable increase in the volume of people paying the tax.
AJ Bell said more than three times the number of basic-rate taxpayers are set to pay dividend tax compared with three years ago. A fifth of all higher-rate taxpayers will now also pay dividend tax, with an average bill of £5,379 each, while additional rate taxpayers will see an average bill of £32,578.
However, while the total tax take has risen, the average dividend tax bill has decreased across all tax bands as more people with smaller dividends are pulled into paying tax, according to AJ Bell. Basic rate taxpayers are set to pay an average of £385 this year, down from £780 three years ago.
Laura Suter, director of personal finance at AJ Bell, said: “The government slashing the tax breaks on dividends means that almost two million more people will have to pay the tax. With the limit sitting at just £500, more basic-rate taxpayers with modest investment portfolios are being dragged into paying the tax. If your investment portfolio is yielding 5%, you need to have £10,000 invested to hit the tax-free limit. The number of basic-rate taxpayers paying the tax is estimated to hit 1.7 million this year, more than treble what it was three years ago.
“Now one in 17 basic-rate taxpayers will have to pay dividend tax, compared to one in 50 just three years ago. At the same time, almost a fifth of all higher-rate taxpayers will pay dividend tax this year.
“What’s particularly frustrating for some of these people is that they will have just breached the dividend allowance, meaning they now have to file a tax return for a piddling amount of tax.”
