SME owners plan to pay themselves dividend ahead of tax hikes

Payments deemed necessary for business owners to avoid a sharp jump in their personal tax bills next year.

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.

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.

Mike Cooper, partner at Moore Stephens, says that 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.”

Cooper adds that changes to dividend tax will hit small business owners very hard – many are on relatively modest levels of income.

“Nonetheless, 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,” he says. 

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.”

More than 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.

Cooper 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.”

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.

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