Thousands more people dragged into dividend tax net
The number of individuals liable for dividend tax is estimated to have reached 3.2 million in 2025/26, up from 3.14 million in 2024/25, according to new Freedom of Information (FOI) figures.
The number of people having to pay dividend tax has almost doubled in the six years since 2020, when 1.81 million were liable to pay it.
The spike comes after successive cuts to the dividend tax allowance. The allowance was lowered from £2,000 to £1,000 in April 2023, then halved again to £500 in April 2024.
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Around 630,000 individuals were brought into paying dividend tax when the allowance was cut from £2,000 to £1,000, according to the FOI figures obtained from HMRC by wealth management firm Quilter shared exclusively with MoneyWeek.
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A further 480,000 were dragged into paying dividend tax when the allowance was cut from £1,000 to £500.
Rachael Griffin, tax and financial planning expert at Quilter, said: “These figures show how dramatically the dividend tax net has expanded in a relatively short period.
“While much attention is given to frozen income tax thresholds, the sharp reduction in the dividend allowance has quietly pulled hundreds of thousands of people into paying tax on investment income for the first time.
“The government has repeatedly said it wants to encourage greater participation in investing, but reducing the tax-free allowance has moved in the opposite direction by increasing both the tax burden and administrative complexity faced by ordinary investors,” Griffin added.
|
Tax year |
Individuals liable for dividend tax |
|
2020/21 |
1,810,000 |
|
2021/22 |
1,830,000 |
|
2022/23 |
1,900,000 |
|
2023/24 |
3,000,000 |
|
2024/25 |
3,140,000 |
|
2025/26 |
3,200,000 |
Source: Quilter
How does dividend tax work?
Dividends are paid to you if you own shares in a company. You don’t pay income tax on any dividends if your income is less than the £12,570 personal allowance.
You also receive a dividend allowance which means if you do pay income tax you can earn up to a certain amount before owing income tax on dividends. For the 2026/27 year, the dividend allowance is £500.
The tax rate you pay depends on your income tax band:
- Basic rate – 10.75%
- Higher rate – 35.75%
- Additional rate – 39.35%
As an example, if you received £3,000 in dividends and earned £29,570 in wages in the 2026/27 year, your total income would be £32,570.
Taking your personal allowance of £12,570 off this figure would leave you with a taxable income of £20,000.
As you are in the basic rate income tax band, you would pay 20% tax on £17,000 of wages, no tax on £500 of dividends because of the dividend allowance and 10.75% tax on £2,500 of dividends.
|
2022/23 |
2023/24 |
2024/25 |
2025/26 |
2026/27 |
|
£2,000 |
£1,000 |
£500 |
£500 |
£500 |
How to protect your dividends from the taxman
You can’t do much about falling dividend tax allowances, but there are ways to lower your dividend tax bill with HMRC.
Use a stocks and shares ISA
Dividends paid on investments held in stocks and shares ISAs are free from tax and don’t take up any of your £500 dividend allowance.
You can put up to £20,000 into a stocks and shares ISA each tax year.
Griffin, from Quilter, said: “Making full use of ISAs remains one of the most valuable planning opportunities available, particularly as the dividend allowance is now just £500.”
Do a ‘Bed and ISA’
If you have investments held outside a tax-wrapper, for example in a General Investment Account (GIA), you could consider transferring them across to an ISA.
The process is known as ‘Bed and ISA’, and involves selling investments in a taxable investment account and immediately buying them back inside a tax-wrapped account.
Investments transferred into an ISA will benefit from tax-free growth.
Transferring assets between spouses
You can transfer shares to a spouse or civil partner who either pays income tax at a lower rate or hasn’t utilised some or any of their dividend allowance.
By doing this, you’re effectively making the most of two sets of allowances.
Ade Babatunde, senior financial planning director at wealth manager Rathbones, said: “Sharing ownership of company shares between spouses or civil partners can allow both parties to utilise their allowances and lower-rate tax bands before higher dividend tax rates begin to apply.”
Consider alternative investments
If you’ve got the risk appetite, you could invest your money in a Venture Capital Trust (VCT).
VCTs are set up to fund younger businesses with high growth potential, and dividends and capital gains on ordinary shares aren’t taxed.
You also receive 20% income tax relief on up to £200,000 held in shares in a VCT, so long as those shares are held for at least five years.
One major drawback to VCTs is that because they invest in early-stage companies, there is a greater risk they could fail and your investments drop in value. For that reason, they can be a good option if you have maxed out your ISA and pension allowances for the financial year.
