Some 3.6 million people are expected to have to pay dividend tax in the coming year, coughing up around £18bn, according to a freedom of information request from analysts at AJ Bell.
This is double the amount that were paying the tax three years ago, said Laura Suter, director of personal finance at AJ Bell. In the past year alone, a further 500,000 people will have to pay the tax thanks to the latest cut to allowances.
Historically, investors have been able to receive a small amount in tax-free income from investments held outside of a tax wrapper (such as an ISA) but in the past few years, this has been scaled right back.
The tax-free dividend allowance was cut twice in April 2023 and April 2024, initially from £2,000 to £1,000 and then again to £500. This has led to a marked increase in the number of people paying the tax.
On average, 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 pay £32,578 in additional tax.
Suter said: “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 yields 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.”
As a result, the average dividend tax bill has dropped 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.
“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,” said Suter.