More than a quarter of UK small business owners plan to pay themselves a special dividend ahead of the introduction in April of new dividend tax rates, according to a survey by accountancy firm Moore Stephens.
Moore Stephens said the rush of dividends payments is necessary if business owners are to avoid a sharp jump in their personal tax bills in 2015-16. Partner Mike Cooper 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 [if] 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.”
From April 6, the Dividend Tax Credit will be replaced by a new Dividend Allowance. It will mean that the first GBP 5,000 (USD 6,960) of dividend income is tax-free. Tax will be charged at the following rates on dividends received above the GBP 5,000 allowance: 7.5 % on dividend income within the basic rate income tax band (up to GBP 43,000, with the first GBP 11,000 covered by the personal income tax allowance); 32.5 % on dividend income within the higher rate band (GBP 43,001-GBP 150,000); and 38.1 % on dividend income within the additional rate band (over GBP 150,001).
Cooper added: “The 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 tax man.”
“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.”
The Moore Stephens survey also revealed that 21 percent of business owners intend to reduce their dividend pay outs once the changes come into force. Just 6 % expect to increase dividends to maintain their net income.
Cooper explained: “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.”
“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.”
Source: Robert Lee, Tax-News