“SME owners should be thinking seriously now about how much of the value they have built up in their businesses that could sensibly be extracted before the April 6 deadline to stay ahead of the taxman.”
More than a quarter (28%) of SME owners are planning to pay themselves a special dividend ahead of forthcoming tax hikes in April, according to a survey of owner managed businesses by Moore Stephens, the Top Ten accountancy firm.
Moore Stephens says that this rush of dividend payments is necessary for business owners to avoid a sharp jump in their personal tax bills next year. For higher rate taxpayers the tax rate on dividends increases from 25% to 32.5% and additional-rate taxpayers will increase from 30.56% to 38.10%, a dividend tax hike of some 7% for all middle and high rank earners.
Andrew Henshaw, Partner at Moore Stephens, says: “Small business owners are moving quickly to take out money from their businesses at a lower tax rate. Providing the accumulated profits are there, it is a perfectly sensible move and undertaken in the right way is something that HMRC has absolutely no issue with. However, SME owners who do not pay a special dividend before April 6 will have missed out.
“The changes to dividend tax will hit small business owners very hard – many are on relatively modest levels of income.
“SME owners should be thinking seriously now about how much of the value they have built up in their businesses that could sensibly be extracted before the April 6 deadline to stay ahead of the taxman.
“Even if business investment is being planned, taking a larger dividend now could still make sound financial sense. Owner-managers could always reinvest their dividend pay-outs as a loan back to the business, which would then be non-taxable when it was repaid.”
Over a fifth expect to cut dividends post 5 April 2016
Over a fifth (21%) of small business owners will reduce their dividend pay outs once the changes come into force in April, while just 6% expect to increase dividends to maintain their net income.
Andrew Henshaw says: “This is going to be a tough adjustment for many SME owners, who are looking at imposing what amounts to a net of tax pay freeze or cut on themselves next year.
“That makes it even more important that they think seriously now about whether to mitigate some of the impact that these changes will have on their income levels next year.”
However, Moore Stephens points out that despite these changes, dividends remain the most tax-efficient form of remuneration for many business owners.
Andrew Henshaw says: “While the increased tax on dividends is unwelcome, it is still marginally less than the tax on earnings, even though the difference between the two has been narrowed.”