The number of people expected to pay dividend tax in the 2024/25 tax year has almost doubled since 2021/22, a Freedom of Information request from AJ Bell has revealed.

An estimated 3.6m people will pay the tax this year, handing HMRC almost £18bn in dividend tax.

More than three times the number of basic-rate taxpayers are set to pay dividend tax compared with three years ago.

Successive cuts to the dividend allowance from £2,000 to £500 have hit investors and the self-employed.

The tax-free dividend allowance was cut twice in April 2023 and April this year to £1,000 and £500 respectively, leading to a marked increase in the volume of people paying the tax.

Many of them 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.

Almost 3.6 million taxpayers are expected to incur tax on dividend income this year:

Laura Suter, director of personal finance at AJ Bell, said: “The government slashing the tax breaks on dividends means that almost two million more people will have to pay the tax.  

“With the limit sitting at just £500, more basic-rate taxpayers with modest investment portfolios are being dragged into paying the tax. The number of basic-rate taxpayers paying the tax is estimated to hit 1.7m this year – more than treble what it was three years ago.”

“What’s particularly frustrating for some of these people is that they will have just breached the dividend allowance, meaning they now have to file a tax return for a piddling amount of tax.”