Millions of people could be hit with a dividend tax bill for the first time this year, with many completely unaware they owe anything until HMRC comes knocking.
Fresh data shows record numbers are being pulled into the tax net after successive cuts to the dividend allowance.
New HMRC figures show the number of people paying the tax will reach a record 3.67million in the 2024/25 tax year, almost double the number from just two years ago.
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Rachael Griffin, tax and financial planning expert at Quilter, warned: "More than 1.1 million basic rate individuals were expected to owe dividend tax in 2024/25.
"For many, this will have come as a surprise, especially if they hold only modest investments outside ISAs or pensions."
The figures, obtained by Quilter through a Freedom of Information request, reveal how cuts to the dividend tax-free allowance have dramatically widened the tax net.
The allowance was reduced from £2,000 to £1,000 in April 2023 and then halved again to £500 in April 2024.
After remaining broadly flat for several years, the number of dividend taxpayers rose from 1.9million in 2022/23 to an estimated 3.08million in 2023/24.
It is now projected to jump again to 3.665million in 2024/25, the latest year for which HMRC has modelled figures.
Fresh data shows record numbers are being pulled into the tax net after successive cuts to the dividend allowance
| PAWhen the reductions were first announced, HMRC estimated that 635,000 people would be brought into paying dividend tax in 2023/24, with a further 1.115million affected in 2024/25.
Updated modelling puts the figures at 865,000 and 480,000 respectively, still totalling more than 1.3million additional taxpayers across the two years.
Griffin said: "These figures show just how quietly but effectively the tax net is expanding. What was once a niche tax affecting a relatively small group of higher earners and business owners is now impacting millions of everyday investors, many of whom are basic rate taxpayers."
HMRC estimated that 635,000 people would be brought into paying dividend tax in 2023/24, with a further 1.115million affected in 2024/25
| GETTYBasic rate taxpayers will make up a large proportion of those affected. HMRC estimates that in 2024/25, around 2.15million basic rate individuals will have taxable dividend income, with 1.11million expected to owe dividend tax, many for the first time.
The Treasury is set to reap a significant revenue boost. The cut to £500 in April 2024 was forecast to raise £450million in 2024/25, rising to £810million in 2025/26, £860million in 2026/27, and £940million in 2027/28.
Griffin added: "The Government has made clear that it expects to raise hundreds of millions in additional revenue from these changes, and the figures show it is well on track to do so.
"But the cost isn’t just financial, the complexity of compliance is growing, particularly for those unfamiliar with the tax system. This policy seems at odds with Labour’s desire to get more people investing.
"As interest rates start to fall and the appeal of cash wanes, more people will look to investing as a way to grow their money. But the tax environment is becoming harder to navigate.
"Making full use of ISAs, pensions and other tax-efficient wrappers has never been more important, especially for those supplementing their income or planning to pass on wealth to the next generation. Seeking financial advice if you are unsure is critical."
ISAs are useful tools for those looking save and avoid paying tax | GETTYWhile HMRC confirmed that many of those affected will not need to register for self-assessment, as tax can often be collected through PAYE or simple assessment, it acknowledged that some people may still need to file a return to settle their liability.
HMRC also confirmed it cannot quantify how many additional self-assessment returns have resulted from the policy.
The growing number of taxpayers caught by the allowance cuts underlines the importance of understanding how dividend income is taxed, particularly for those who have never paid it before.