Impact of Dividend Tax Squeeze Affecting 3.7 Million Individuals: Strategies to Safeguard Investments
UK Dividend Tax Revenue Hits £18.6 Billion
The UK government is set to generate approximately £18.6 billion in revenue from dividend tax during the 2025/26 tax year, according to HMRC estimates. This revenue comes from around 3.7 million taxpayers across all income tax bands, with higher-rate and additional-rate taxpayers contributing the majority of the revenue.
Over recent years, the dividend tax allowance has been significantly reduced, expanding the number of people liable to pay dividend tax and increasing the total tax revenue. For instance, the dividend allowance has shrunk from £2,000 in just a few years ago to £500 in 2024-25 and continuing for 2025-26. This reduction has resulted in the number of people paying dividend tax more than doubling in the past four tax years—from about 1.8 million to 3.7 million people.
The average dividend tax bills in 2025/26 also highlight the progression:
- Basic-rate taxpayers pay on average £382,
- Higher-rate taxpayers pay about £6,202,
- Additional-rate taxpayers pay on average £29,879 annually on dividends.
These figures reflect the effect of both the shrinking allowance and relatively higher tax rates on dividends, which have been set at 8.75% for basic-rate, 33.75% for higher-rate, and 39.35% for additional-rate taxpayers for 2025-26.
In an effort to further increase revenue, the deputy prime minister, Angela Rayner, has recommended scrapping the dividend tax allowance and increasing the level of dividend tax paid by the wealthiest investors.
However, there are ways to exempt investments from paying dividend tax. Making use of tax-efficient wrappers such as ISAs, pensions, and Venture Capital Trusts (VCTs) can shield investments from paying dividend tax. Venture Capital Trusts (VCTs) are exempt from dividend tax, but they are typically high-risk investments. Dividends can also accumulate in a pension without eating into the dividend allowance.
With the number of dividend taxpayers expected to rise further to 3.67 million in the 2024/25 tax year, it is important for investors to understand the impact of dividend tax and how to minimise their liability. Many basic rate taxpayers (1.1 million) are expected to owe dividend tax for the first time in 2024/25.
In conclusion, the UK government's revenue from dividend tax has increased significantly over time due to lower tax-free allowances on dividends, bringing more taxpayers into liability and increasing government receipts substantially from this source in recent years.
- To minimize their dividend tax liability, investors in the UK can consider investing in tax-efficient wrappers such as ISAs, pensions, or Venture Capital Trusts (VCTs).
- The UK government's revenue from dividend tax is primarily collected from higher-rate and additional-rate taxpayers, contributing the majority of the revenue, making personal finance management crucial for those groups.
- The deputy prime minister, Angela Rayner, has recommended scrapping the dividend tax allowance and increasing the level of dividend tax paid by the wealthiest investors in an effort to further increase revenue, indicating a focus on personal-finance reforms in UK investing strategy.
