2 days ago
Dividend tax to affect record 3.7m investors after allowance cut
Millions of investors are being caught by dividend tax after a series of cuts to the tax-free allowance.
The number of people paying dividend tax will reach a record 3.7 million in the 2024/25 tax year — almost double the 1.9 million recorded two years earlier, according to HM Revenue & Customs (HMRC) figures.
The squeeze has been years in the making. In April 2018, the Conservatives cut the dividend allowance from £5,000 to £2,000, pulling more people into paying tax on share income. It was then cut to £1,000 in April 2023 and halved again to £500 in April. While the tax rates on dividends have not risen, the shrinking allowance has dramatically widened the scope of the levy, capturing hundreds of thousands of people with modest portfolios.
Rachel Griffin, of the wealth manager Quilter, which obtained the figures through a freedom of information request, said: 'For a client with a £50,000 general investment account yielding 4 per cent in dividends, the annual dividend income would be £2,000. Under the old allowance, this was entirely tax-free. Now, with the allowance at £500, £1,500 is taxable. For a basic-rate taxpayer, that's an extra £150 a year in tax — not a huge sum, but enough to prompt action to restructure their holdings.'
It comes after the chancellor, Rachel Reeves, announced plans to rip up red tape to allow banks to nudge savers towards investing in an attempt to improve returns and boost the economy.
When the dividends allowance cuts were announced in 2023, HMRC expected 635,000 individuals to be brought into the tax net in 2023/24 and a further 1.12 million in 2024/25. Updated modelling shows the actual impact is still substantial: 865,000 people were affected in 2023/24 and another 480,000 will be affected this year — more than 1.3 million in total.
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Basic-rate taxpayers bear much of the burden. HMRC estimates that in 2024/25 about 2.15 million people in this band will have taxable dividend income, with 1.11 million expected to owe dividend tax, many for the first time. For some, the amounts due will be small, but the policy marks a significant expansion of the taxpayer base and a growing compliance challenge.
HMRC forecasts that the cut to £500 will raise £450 million in 2024/25, climbing to £810 million in 2025/26, £860 million in 2026/27 and £940 million in 2027/28.
Many affected investors will not need to file a self-assessment return because HMRC can collect the tax through Paye or 'simple assessment'. However, the department says it cannot estimate how many extra self-assessment filings the change has prompted.
Griffin said: 'These figures show just how quietly but effectively the tax net is expanding. What was once a niche tax affecting a relatively small group of higher earners and business owners is now impacting millions of everyday investors, many of whom are basic-rate taxpayers.
'For many, this will have come as a surprise, especially if they hold only modest investments outside Isas or pensions. The government has made clear it expects to raise hundreds of millions from these changes and the figures show it is on track to do so. But 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.'
