Rumoured dividend tax raid would hit millions of basic-rate taxpayers with annual bill of £500

• IG analysis shows 4 point rise in basic-rate dividend tax would hit 3.2 million taxpayers – many of whom fall within government’s ‘working people’ category
• Institute of Fiscal Studies research suggests this could result in £500 annual hit per person
• IG calls on government to leave dividend tax alone to protect retail investors and the UK stock market

Millions of basic-rate taxpayers would be hit with an annual bill of £500 under rumoured Treasury plans to raise dividend tax in next week’s Autumn Budget, according to new analysis from investment and trading platform IG.

The government is thought to be planning a four percentage point increase in the basic-rate of dividend tax – from 8.75% to 12.75%.

IG analysis of dividend income received in 2022/23 indicates that this would leave the 3.2 million basic-rate taxpayers in the UK who receive dividend income, with an additional annual bill of £380 per person. However, forecasts from the Institute for Fiscal Studies (IFS) show this will rise to £500 per person by 2029/30.

The potential increase lands at a time when dividend tax has already dragged more people into the system, with frozen thresholds and previous hikes swelling the number of people who now pay tax on their investments. HMRC figures show £70.5 billion of dividend income outside tax-free investments was reported in the most recent year where data is available (2022/23), £30 billion of which was received by those with incomes lower than £50,000.

The analysis forms part of IG’s Hands off our investments campaign, which urges the Chancellor to avoid measures that undermine long-term investing at a time when the government is trying to build a culture of retail investment. The campaign warns that raising dividend tax – often viewed as an easy revenue lever – risks disproportionately hitting pensioners, small business owners and first-time investors who rely on modest portfolio income.

Michael Healy, UK Managing Director at IG, said: “Dividend tax changes might look like a quick and painless way to raise revenue, but an increase will hurt millions of people and undermine the government’s own ambition to build a nation of investors. At a time when households are trying to grow their wealth and the UK stock market needs long-term capital, now is the worst possible moment to make investing in UK stocks less attractive.

“We are urging the government to keep its hands off our investments. Any raid on dividend tax or other investment incomes sends completely the wrong message to the many savers the government wants to convert to investing.”

A more extreme government measure potentially on the cards – scrapping the £500 tax-free dividend allowance entirely – would raise another £325 million tax according to HMRC estimates. This would result in an additional annual bill of £62.50 for basic-rate taxpayers, leaving them with a combined annual hit of £562.50 in five years’ time.

About the research 

Dividend tax revenue estimates

• The average current per-investor cost (£380) is calculated by dividing the total revenue raised by the 3.2 million basic-rate taxpayers who receive dividend income (provided by HMRC – Table 3.7).
• The data in HMRC Table 3.7 shows those with income under £50,000 earned £30 billion in dividend income in the latest data available. If levels of dividend income remain the same, a 4ppt increase in dividend tax would raise £1.2 billion additional tax, costing the average basic-rate taxpayer £380.
• The £500 figure is calculated in the same way but uses the forecast from the Institute for Fiscal Studies showing a one-percentage-point rise in basic-rate dividend tax would raise an extra £400 million.
• A four-point rise therefore generates c. £1.6 billion in additional revenue – breaking down to £500 per person.

Dividend allowance abolition scenario

• HMRC estimates that each £100 reduction in the dividend allowance raises £65 million.
• Scrapping the £500 allowance therefore raises around £325 million.
• If we assume all 3.2 million low income savers used the allowance but no longer can then each would pay 12.75% on that £500 which equals £62.50 per tax payer or £200 million in total from this group.

Dividend income and taxpayer numbers

• Dividend income figures (£70.5 billion) and total taxpayer counts are taken from HMRC’s Personal Incomes Statistics (2022–23).
• These figures show a rising number of individuals now paying dividend tax, including many basic-rate and low-income investors

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