Changes in the tax code have led to a big rise in the percentage of profits paid out as dividends by SMEs, a new survey has found. Accountancy practice Moore Stephens says that UK corporate SMEs paid out 94% of their profits as dividends last year, up from 63% the year before.
The move came ahead of changes to the tax code which came into effect from April this year. Moore Stephens explains that “whilst the government have introduced an allowance which means that the first £5,000 of dividend receipts in a tax year will now go untaxed, business owners and other taxpayers receiving dividends will have to pay a higher marginal tax rate on the remainder, applying from 6 April 2016.”
The change has meant that total dividend payments made by UK SMEs increased to £28.3bn in 2015/16, up from £17.5bn in 2014/15.
‘Changes will continue to have an impact’
“Many small business owners are basic-rate taxpayers, who will be particularly hard hit by the changes and may face difficulties when looking to grow their businesses,” said Mike Cooper, partner at Moore Stephens.
“Ahead of the changes, SME owners reduced reinvestment into their businesses in 2015-16 compared to the previous year, and the changes will continue to have an impact on future plans. From now on, business owners will have to take out a higher percentage of profits in order to maintain the same post-tax income.”
“It is possible that the uncertainty over the Brexit vote also contributed to the rise in profits paid out as dividends by SMEs. Some business owners may have acted on a just-in-case basis and taken out extra funds to support themselves through any post-Brexit instability.”