- HMRC expects to rake in almost £18 billion in dividend tax this tax year
- Number of those hit by the tax has almost doubled since 2021/22, with just under 3.6 million expected to pay this year
- More than three times the number of basic-rate taxpayers are set pay dividend tax compared with three years ago
- Successive cuts to the dividend allowance from £2,000 to £500 have hit investors and the self-employed
- Average dividend tax bill has reduced as many people with small dividends are dragged into paying
The number of people expected to pay dividend tax in the 2024/25 tax year has almost doubled since 2021/22, a Freedom of Information request from AJ Bell can reveal. Just under £18 billion is set to line Treasury coffers for this tax year alone, with nearly 3.6 million taxpayers subject to tax on dividend income.
The tax-free dividend allowance was cut twice in April 2023 and April 2024 to £1,000 and £500 respectively, leading to a marked increase in the volume of people paying the tax. Many of these are basic-rate taxpayers who are only just breaching the allowance, meaning they won’t have a huge bill to pay but will still be required to notify HMRC.
A fifth of all higher-rate taxpayers will now 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 plummeted across all tax bands as more people with smaller dividends are pulled into paying the tax. Basic-rate taxpayers are set to pay an average of just £385 this year, down from £780 three years ago.
Almost 3.6 million taxpayers are expected to incur tax on dividend income this year:
Laura Suter, director of personal finance at AJ Bell, comments:
“The government slashing the tax breaks on dividends means that almost two million more people will have to pay the tax.
“Between April 2023 and April 2024, the Conservatives cut the tax-free limit on dividends from £2,000 down to £500, with the latest figures showing that an estimated 3.6 million people will pay dividend tax in the current tax year – 1.8 million more than three years ago. In the past year alone another half a million people will have to pay the tax, thanks to the latest cut to allowances seeing the tax-free limit cut from £1,000 to £500 in April this year.
“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 will have to notify HMRC for a piddling amount of tax. The average dividend tax bill for basic-rate taxpayers is £385 – though many will be paying far less than that.
“Looking at the average dividend tax bill over the years we can see that more taxpayers with smaller portfolios have been pulled into paying the tax. In 2021-22 the average dividend tax bill for a basic-rate taxpayer was £780 but this has now dropped to £385 – despite dividend tax rates rising during this period.”
