With the UK economy treading water ahead of the upcoming Autumn Budget, uncertainty continues to loom large.
Economic growth remains slow, and a growing number of investors and everyday taxpayers are beginning to feel the financial strain. In fact, a record number of individuals are now expected to be hit with a Dividend Tax bill.
Record figures, but why?
Data obtained by Quilter via a Freedom of Information request to HM Revenue and Customs (HMRC) reveals that 3.7 million people are projected to pay Dividend Tax during the 2024/25 tax year. This marks a significant rise, double the number who paid the tax just three years earlier in 2021/22.
This surge comes at a time when the economy is struggling to grow and the figures back that up. In the first quarter of 2025, the economy grew by just 0.7 per cent.
For investors seeking growth, opportunities appear increasingly limited and for taxpayers potentially investing their savings, increased figures are hardly likely to encourage investment.
What factors are behind the rise in Dividend Tax figures?
While the Dividend Tax rate itself has remained unchanged, the amount investors can earn tax-free has been dramatically reduced over recent years.
The rise is primarily due to a series of cuts to the dividend tax-free allowance, pushing many more investors and basic taxpayers over the taxable threshold.
Back in 2018, the tax-free dividend allowance stood at £5,000. Today, it’s just £500. This steep decline, driven by fiscal tightening under both Conservative and Labour governments, has substantially widened the pool of taxpayers affected.
This reduction has led to a steady increase in the number of people paying Dividend Tax. In 2020/21, 1.8 million individuals were impacted. That number is now expected to reach 3.7 million in 2024/25 and continuing rising for years to come.
What is HMRC projecting to collect during this period?
According to HMRC projections, over £450 million is expected to be raised from Dividend Tax in 2024/25. This figure is set to rise sharply to £810 million in 2025/26.
The Government argues that such tax changes are essential for balancing the books with borrowing and increasing spending on rise.
They cannot break their own fiscal rules leaving taxpayers feeling the brunt of the cuts and paying an unexpected tax bill.
How is Dividend Tax impacting basic taxpayers?
Dividend Tax has traditionally been seen as a charge affecting wealthier individuals and high-level investors, but the continuous cuts have impacted basic taxpayers.
More and more basic rate taxpayers are now being dragged into the Dividend Tax net. HMRC estimates that over 2 million basic taxpayers will pay the tax during the current tax year, a figure expected to rise further as the threshold remains low.
This development poses challenges for individuals attempting to grow their savings through investments, especially during a time when disposable income is already under pressure.
Chancellor Rachel Reeves has publicly announced she is cutting the red tape on banks to encourage individuals to invest. However, rising tax burdens may have the opposite effect, discourage investment and complicate financial planning for millions.
Seeking financial advice?
If you’re concerned about how Dividend Tax or other financial pressures could affect your situation, speak with financial experts.
A financial adviser can assess your current financial circumstances, explain the impact of recent tax changes, and help you create a strategic plan to safeguard your income and investments.