Almost 3.6 million shareholders and self-employed workers will pay nearly £18bn to HMRC this year.
Further, more than triple the number of basic-rate taxpayers will pay dividend tax than three years ago, according to a Freedom of Information (FOI) request by AJ Bell.
This is due to the threshold falling from £2,000 to £1,000 in April 2023 and then to £500 in April 2024. Former Chancellor Jeremy Hunt announced cuts to the tax-free dividend allowance in his Autumn Statement in November 2022.
Many working people with “modest investment portfolios” will be dragged into the tax threshold, the research found.
Because of this, many taxpayers find themselves with an unwelcome surprise when they discover the need to complete a tax return.
In the new tax year of 2024/25, basic-rate taxpayers are expected to pay an average of £385, which, as more people fall into the threshold, is less than half the average amount of £780 in 2021/22.
Dividends are payments made to shareholders from a company that has a tax-free allowance, after which basic-rate taxpayers are required to pay 8.75%.
If you are on a higher rate, that increases to 33.75% on dividends above the allowance, and additional-rate taxpayers need to pay 39.95%. However, you do not need to inform HMRC if your dividends do not breach your dividend allowance for the year.
‘Modest investment portfolios dragged into paying tax’
Laura Suter, director of personal finance at AJ Bell, 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 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.”
Suter added: “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. The average dividend tax bill for basic-rate taxpayers is £385 – though many will be paying far less than that but still having to do battle with HMRC.”
