Number of people paying dividend tax doubles in three years

The number of people expected to pay dividend tax in the current tax year has almost doubled since 2021/22, a Freedom of Information request from AJ Bell can reveal. HMRC is set to take in just under £18 billion in this tax year alone, with nearly 3.6 million taxpayers subject to tax on dividend income.

The number of people paying dividend tax has risen as the Government has cut the tax-free dividend allowance twice in the past few years. The first cut came in April 2023 from £2,000 to £1,000, followed by another in April 2024 down to £500. Many of these new payers of dividend tax are basic-rate taxpayers who are only just breaching 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 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 £385 this year, down from £780 three years ago.

Number of people paying dividend tax: by income tax band

Source: AJ Bell/HMRC. The 2020-21 and 2021-22 figures are outturn based on the HMRC Survey of Personal Incomes (SPI). The 2022-23, 2023-24 and 2024-25 estimates are based on the 2021-22 SPI.

With the limit sitting at just £500, more basic-rate taxpayers with modest investment portfolios are having to pay 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.

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 divided tax rates rising during this period.

Average dividend tax bill per income tax band - 2024/25

Source: HMRC/AJ Bell. Figures for 2024/25 based on estimates from HMRC.

How to beat the dividend tax

All investments held in an ISA or pension aren’t subject to the dividend tax, so your route to a lower tax bill is to move your money into these accounts. Assuming you still want access to this money and don’t want it tied up in a pension, the best option would be an ISA.

The annual ISA allowance is currently £20,000, so you can move investments into your account up to this limit. You’ll just need to check whether you’ve made any contributions to any other ISA accounts this tax year. You can move your investments through a process called ‘Bed and ISA’ with your investment platform. This is simply a pair of deals carried out at the same time, where you sell an investment from your Dealing account and immediately buy it back in your Stocks and shares ISA or Lifetime ISA (LISA). This helps you make the most of your annual tax-free ISA allowance and means any future growth and income generated by your investments will be protected from tax. You can carry out a Bed and ISA across a wide range of UK investments, such as shares, investments trusts, ETFs and bonds.

If you have a spouse who also hasn’t used their ISA allowance this year (and doesn’t have their own investments outside an ISA that they want to transfer in) you can use their £20,000 ISA allowance too and shift your portfolio away from tax more rapidly. This is called a ‘Bed and Spouse and ISA’, and follows a similar process to above but you transfer the assets to your spouse’s dealing account first.

If your non-ISA investment pot is larger than your allowances the smartest move is to prioritise shifting your biggest dividend-paying investments into your ISA first. This means that you can shelter more of your dividend income from tax first and therefore cut your tax bill.

To do this you’d need to look at your portfolio and rank the holdings by how much income they generate. You then start at the top of this list and move the highest income generating investments into an ISA first, before working your way down. The exact amount of tax you’d save depends on your specific portfolio and how quickly those income-paying investments can be moved into an ISA.