The number of people expected to pay dividend tax in the 2025/26 tax year has more than doubled since 2021/22, a Freedom of Information request from AJ Bell can reveal. With 3.7 million taxpayers subject to tax on dividend income, over £18 billion is set to line Treasury coffers for this tax year alone.
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 may still be required to file a tax return.
Nearly a fifth of all higher-rate taxpayers will now pay dividend tax, with an average bill of £6,202 each, while additional rate taxpayers will see an average bill of £28,879.
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 £382 this year, down from £780 three years ago.
Laith Khalaf, head of investment analysis at AJ Bell, comments: “Taxes on dividends have skyrocketed in recent years as a result of severe cuts to the annual dividend allowance, which is the amount of dividends you can receive each year without paying tax. It now stands at just £500 a year, down from £2,000 in the 2022 to 2023 tax year, and down from £5,000 when it was introduced in 2016. As a result, over 3.7 million people are expected to pay tax on dividend income which is more than double what it was four years ago. Combined with frozen tax thresholds dragging more people into higher tax bands, this could mean heaps more tax for those with even modestly sized portfolios.
“Investors can take action to shelter their dividends from tax using an ISA, which also protects them from capital gains tax too. The generous £20,000 annual ISA allowance is a vital defence for investors against the rising tax tide. It may well be that investors aren’t making the most of this tax break. Despite the chancellor saying she wants to reignite retail interest in the UK stock market, FTSE 100 stocks will be amongst those most vulnerable to dividend tax because of their relatively high yield. The dividend tax, combined with stamp duty on UK share purchases, means the tax system actually penalises those who invest domestically rather than overseas.”
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