Skip to content 
The Great Dividend Tax Squeeze: Why More Investors Are Paying More Tax Than Ever
The once-generous tax-free dividend allowance in the UK has been slashed dramatically—from £5,000 in 2016 to just £500 in the 2024/25 tax year. As a result, millions of investors, small company directors, and casual shareholders are finding themselves dragged into the dividend tax net for the first time.
This aggressive reduction in the allowance has turned what was once a niche tax concern into a mainstream financial burden. For those with even modest investment income, the cost is rising—and fast.
How Many Are Affected?
The impact has been nothing short of staggering. In just a few years, the number of people liable for dividend tax has more than doubled:
- 2021-22: 1.83 million taxpayers
- 2025-26 (forecast): 3.7 million taxpayers
HMRC expects to collect £18.6 billion in dividend tax revenue by 2025-26, up from £14.7 billion just a few years earlier. This is not simply due to higher dividends, but rather the widening scope of the tax itself.
Who Is Paying the Most?
According to a Freedom of Information request by AJ Bell:
- Higher-rate taxpayers (40%) now face an average annual dividend tax bill of £6,202, affecting around 1.24 million individuals.
- Additional-rate taxpayers (45%) are even harder hit, with an average bill of £28,879, affecting 340,000 people.
Nearly one in five higher-rate taxpayers is now subject to dividend tax. And while the average tax bill per person has dropped slightly (due to more low-level investors being pulled into the tax), the total burden has significantly increased.
Why This Is Happening
The dividend tax squeeze is the result of a policy shift—a deliberate move by successive Chancellors to target dividend income as a new source of revenue. Key changes include:
- April 2023: Allowance cut from £2,000 to £1,000
- April 2024: Further reduced to £500
This erosion coincides with frozen personal tax thresholds, meaning more people are being pushed into higher tax bands. Investors who previously fell outside the dividend tax radar now find themselves liable, even on modest investment portfolios.
Impact on Basic Rate Taxpayers
Even basic rate taxpayers—previously shielded from most dividend tax—are now affected. Although their average bill remains relatively low (around £382), they may still need to:
- Complete and file a Self Assessment tax return
- Track and report dividend income accurately
This administrative burden is a significant shift for taxpayers who may only earn a few hundred pounds in dividends each year.
Domestic Investors Penalised?
A major criticism of the new system is its impact on UK-based investments. According to AJ Bell’s Laith Khalaf, UK investors face a “double tax hit”:
- Dividend tax on income from UK shares
- Stamp duty on share purchases
This makes investing in UK stocks—especially high-yielding FTSE 100 companies—less attractive compared to overseas alternatives.
Ironically, this tax structure seems at odds with the Chancellor’s stated goal of revitalising the UK’s retail investor market.
Is There a Way to Reduce or Avoid Dividend Tax?
Yes—and smart investors are already taking action.
Use Your ISA Allowance: The £20,000 annual ISA allowance allows investors to:
- Shield dividends from tax completely
- Avoid capital gains tax (CGT)
- Eliminate the need to report dividends on a tax return
Despite the benefits, many investors are not fully utilising their ISA allowance—missing a simple yet powerful tax shelter.
Consider Pension Contributions: Dividends held within a Self-Invested Personal Pension (SIPP) are also tax-free. Plus, pension contributions can reduce taxable income, potentially pulling an investor back into a lower tax bracket.
Treasury’s Take: A Revenue Boost
The government expects these changes to bring in an additional £810 million in 2025-26, increasing to £860 million in 2026-27. This forecast shows how heavily HMRC is now leaning on dividend tax as a stable, growing revenue stream.
And while HMRC data shows relatively few people with income below £50,000 receive large dividend payments, among those earning over £500,000, 35% have other income like dividends. That figure rises to 52% for those earning over £1 million—suggesting this tax still primarily targets wealthier individuals, though many with smaller investments are now caught in the crossfire.
Act Now to Protect Your Dividends
More people are paying higher dividend tax because the dividend allowance is shrinking and tax thresholds are expanding. Whether you are an experienced investor or have a small portfolio, it’s time to reconsider your tax strategy. As dividend tax continues to rise, smart tax planning is now essential, not optional.