The dividend tax net attracted thousands more individuals

A reduced allowance are forcing tens of thousands of people to pay dividend tax, but there are ways to protect yours from the tax collector

According to new Freedom of Information (FOI) data, the number of people subject to dividend tax is estimated to have increased from 3.14 million in 2024/25 to 3.2 million in 2025/26.

In the six years since 2020, when 1.81 million people were required to pay dividend tax, the number of people required to do so has nearly doubled.

Following several reductions to the dividend tax allowance, there is an increase. In April 2023, the allowance was reduced from 2,000 to 1,000, and in April 2024, it was cut in half again to 500.

According to FOI data that wealth management company Quilter obtained from HMRC and shared exclusively with BFIA, approximately 630,000 people were forced to pay dividend tax when the allowance was reduced from 2,000 to 1,000.

Watch the full video here: When the allowance was reduced from £1,000 to £500, an additional 480,000 were forced to pay dividend tax.

According to Quilter's tax and financial planning specialist Rachael Griffin: "These numbers demonstrate how significantly the dividend tax net has grown in a comparatively short time."

"While frozen income tax thresholds receive a lot of attention, the drastic cut to the dividend allowance has quietly forced hundreds of thousands of people to pay taxes on investment income for the first time.

Griffin continued, "The government has consistently stated that it wants to promote increased investment participation, but lowering the tax-free allowance has moved in the opposite direction by increasing the tax burden and administrative complexity faced by ordinary investors."

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How to keep your dividends safe from taxes.

Although there isn't much you can do about declining dividend tax allowances, you can work with HMRC to reduce your dividend tax bill.

Make use of a shares and stocks ISA.

Dividends paid on stock and share investments held in individual savings accounts (ISAs) are tax-free and do not deduct from your 500 dividend allowance.

A stocks and shares ISA allows you to invest up to £20,000 per tax year.

According to Griffin from Quilter, utilizing ISAs to their fullest potential is still one of the best planning options available, especially since the dividend allowance is currently only £500."

Execute an ISA and Bed.

You might think about moving your investments from a General Investment Account (GIA) to an ISA if they are kept outside of a tax wrapper.

Selling investments in a taxable investment account and buying them back right away inside a tax-wrapped account is known as the "Bed and ISA" process.

Growth on investments moved into an ISA will be tax-free.

Transferring property between spouses.

Shares may be transferred to a spouse or civil partner who has not used any of their dividend allowance or who pays income tax at a reduced rate.

You are essentially maximizing two sets of allowances by doing this.

"Sharing ownership of company shares between spouses or civil partners can allow both parties to use their allowances and lower-rate tax bands before higher dividend tax rates begin to apply," stated Ade Babatunde, senior financial planning director at wealth manager Rathbones."

Think about investing in different ways.

You could put your money into a venture capital trust (VCT) if you're willing to take some risk.

Dividends and capital gains on common shares are not subject to taxation, and VCTs are designed to finance younger companies with significant growth potential.

Additionally, if you own shares in a VCT for at least five years, you are eligible for 20 percent income tax relief on up to £200,000.

Because VCTs invest in early-stage businesses, there is a higher chance that they will fail and your investments will lose value, which is a significant disadvantage. Because of this, if you have used up all of your ISA and pension allowances for the fiscal year, they might be a good choice.