SME owners move to head off tax on dividends

More than a third (40 per cent) of Midlands 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 per cent to 32.5 per cent and additional-rate taxpayers will increase from 30.56 per cent to 38 per cent. Dividend tax rates for anyone receiving more than £5,000 will increase by 7.5 per cent from 6th April 2016.

A quarter (25 per ent) of small business owners in the Midlands will reduce their dividend pay outs once the changes come into force in April, while just 9 per cent expect to increase dividends to maintain their net income.

Ross Northall, tax director at Moore Stephens, which has offices in Leicester, Northampton and Corby, said: “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.

“Sharp increases in dividend tax is really not the best way to encourage entrepreneurialism or risk-taking.”