Number of people paying dividend tax DOUBLES in two years to hit record 3.7m
Updated:
Record numbers of investors are being stung by dividend tax as they breach the reduced £500 tax-free allowance.
The number of individuals paying tax on dividend payments is expected to reach a record 3.67million in the last tax year, according to a Freedom of Information request by Quilter.
It is almost double the number recorded just two years earlier in 2022/23, following successive cuts to the dividend tax-free allowance.
The wealthiest investors and small business owners, who often choose to pay themselves via dividends, are most affected by dividend tax; however, cuts to allowances mean more basic rate taxpayers are drawn into the tax net.
Dividend cuts sting: More basic-rate taxpayers are paying tax on their payments
The dividend tax-free allowance was reduced from £2,000 to £1,000 in April 2023 and halved to just £500 in April 2024, which has pushed millions more people into paying tax.
HMRC figures show that after remaining flat for years, the number of dividend taxpayers rose 1.9million in 2022/23 to an estimated 3.08million in 2023/24.
This is expected to jump to a forecast 3.6million in the last tax year.
The increase in dividend taxpayers surpasses HMRC's initial estimate of 635,000 individuals paying the tax in 2023/24, which has been revised upwards to 865,000.
Its updated modelling has brought down the predicted 1.1million people affected in 2024,25 to 480,000, but still amounts to over 1.3million additional taxpayers over two years.
Basic-rate taxpayers are bearing the brunt of the cuts to the tax-free allowance. If your dividend income is higher than your personal allowance plus your tax-free dividend allowance, you'll pay dividend tax according to your income tax band.
The current tax rates are currently 8.75 per cent for basic rate taxpayers, 33.75 per cent for higher rate taxpayers and 39.35 per cent for additional rate taxpayers.
The tax office estimates that in the last tax year, around 2.15million had taxable dividend income, with 1.11million expected to owe dividend tax - many for the first time.
The tax take is forecasted to jump following the cut to £500 to £450million in 2024/25, almost doubling to £810million in 2025/6 and £860million in 2026/27. By 2027/28, it is expected to rake in £860million, according to HMRC's projections.
While many taxpayers won't have to register for self-assessment for dividend payments, HMRC told Quilter it could not quantify how many additional returns have resulted from the policy.
Rachael Griffin, tax and financial planning expert at Quilter, said: 'The Government has made clear that it expects to raise hundreds of millions in additional revenue from these changes, and the figures show it is well on track to do so.
'But the cost isn't just financial, the complexity of compliance is growing, particularly for those unfamiliar with the tax system. This policy seems at odds with Labour's desire to get more people investing.
'As interest rates start to fall and the appeal of cash wanes, more people will look to investing as a way to grow their money. But the tax environment is becoming harder to navigate.
'Making full use of Isas, pensions and other tax-efficient wrappers has never been more important, especially for those supplementing their income or planning to pass on wealth to the next generation. Seeking financial advice if you are unsure is critical.'
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