Number of Dividend Tax Payers Doubles in Three Years

The number of individuals liable for dividend tax has surged, doubling in just three years, as recent cuts to tax-free allowances disproportionately affect smaller investors and the self-employed. The HMRC anticipates collecting nearly £18 billion in dividend tax for the 2024/25 tax year, reflecting a significant increase in taxpayers since 2021/22. The dividend tax-free threshold has been reduced from £2,000 to £1,000 in April 2023, and will further decrease to £500 starting April 2024, pushing more basic-rate taxpayers into the tax bracket. As a result of these changes, many individuals with minimal dividend income will now be required to file tax returns. Approximately 20% of higher-rate taxpayers are expected to incur an average dividend tax bill of £5,379 this year, while additional rate taxpayers face an average bill of £32,578. Basic-rate taxpayers, on the other hand, will see their average tax bill drop to £385, down from £780 three years ago, although many will still need to navigate the complexities of filing despite low earnings. Laura Suter, director of personal finance at AJ Bell, highlighted the frustration among those who have just exceeded the dividend allowance, forcing them to engage with HMRC over relatively small amounts. Recent HMRC data indicates a notable rise in pensioners paying tax, with numbers climbing from 7.85 million in 2023/24 to 8.51 million in 2024/25, marking a significant increase from 4.9 million in 2010/11. Additionally, half a million taxpayers are expected to receive tax demand letters, a situation exacerbated by rising interest rates that may push individuals with modest savings into taxable income. Many pensioners will face tax demands for the first time, as frozen thresholds have elevated their combined state and private pension incomes above the tax threshold.