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 has indicated.

Just under £18bn is set to boost Treasury finances for this tax year alone, with an estimated 3.6 million taxpayers subject to pay 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 have only just breached the allowance, meaning they won’t have a huge bill to pay but will still be required to file a tax return.

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 intake has risen, the average dividend tax bill has plummeted across all tax bands as more people with smaller dividends are pulled into paying a tax bill. Basic rate taxpayers are set to pay an average of just £385 this year, down from £780 three years ago.

Director of personal finance at AJ Bell, Laura Suter, said that the Government cutting the tax breaks on dividends means that almost two million more people will have to pay the tax.

“With the limit sitting at just £500, more basic-rate taxpayers with modest investment portfolios are being dragged into paying the tax,” Suter commented. “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.

“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.”

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