UK corporate SMEs reportedly paid out 94 per cent of their profits as dividends, up from 63 per cent the year before, suggesting a dip in confidence
In last year’s summer budget, then-Chancellor George Osborne outlined changes that require SME business owners to generally pay higher taxes on dividends.
Consequently, most SMEs paid out nearly all of their profits as dividends in that financial year, up from the year before.
According to accountancy firm Moore Stephens, these changes will significantly increase the tax burden for businesses and make it more difficult for business owners to manage their finances effectively.
While 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.
Net profits of UK SMEs have grown far more slowly than dividend payments
The revised tax rates on dividends means basic rate taxpayers now have to pay 7.5 per cent, when they were previously not liable to taxation. Higher rate taxpayers have to pay 32.5 per cent, up from the 25 per cent rate. Additional rate taxpayers now pay 38.1 per cent, instead of the 30.56 per cent rate.
“From now on, business owners will have to take out a higher percentage of profits in order to maintain the same post-tax income,” Mike Cooper, partner at Moore Stephens explained.
“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. Politicians need to use tax policy to help entrepreneurs, rather than hinder them. Continuous changes may disrupt small businesses and force entrepreneurs to overhaul their business plans,” he added.
But does this have any bearing to the Brexit vote?
“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,” Cooper explained.
The percentage of profits paid out as dividends