Year-End & Cash Flow

Greater profits taken as dividends as small firms anticipate tax rate change

Fred Heritage | 2 August 2016 | 8 years ago

tax
Fewer business owners are choosing to reinvest profits
Smaller UK companies paid out 94 per cent of profits made by their firm as dividends in the last 12 months, up from 63 per cent the previous year.

In advance of significant changes to taxes on dividends, more and more business owners chose to extract profits rather than reinvest in ventures.

A recent study conducted by accountancy firm Moore Stephens revealed that total dividend payments made by small UK firms increased to 28.3bn from 2015 to 2016, up from 17.5bn between 2014 and 2015.

Worries have emerged amongst businesses that changes to tax rates on dividends made by former chancellor George Osborne after the 2015 general election will significantly increase the tax burden on owners, and make it more difficult for them to manage finances.

Although a government allowance was introduced that sees the first 5, 000 of dividend receipts in a tax year go untaxed, from 6 April 2016 business owners receiving dividends have had to pay a higher marginal rate of tax on the remaining amount.

As the most likely to be basic rate taxpayers, small and micro business owners are expected to be hardest hit by the changes. Whereas previously basic rate taxpayers werent liable to pay any tax on dividends, from now on theyll be required to pay 7.5 per cent.

The revised tax rate on dividends also required higher rate taxpayers to pay 32.5 per cent, up from 25 per cent, and additional rate taxpayers to pay 38.1 per cent as opposed to 30.5 per cent.

Partner at Moore Stephens, Mike Cooper, said that politicians needed to take greater steps to help small business owners and entrepreneurs rather than hinder them. Entrepreneurs want to see future governments encouraging growth by reducing tax on dividends, he said.

if the tax on dividends cannot return to its original level, entrepreneurs will at least call for it to remain unchanged to avoid any further damaging financial disruptions.

Cooper also considered uncertainty in the run up to the Brexit vote on 23 June as a possible reason why business owners were taking greater profits as dividends. ‘some owners may have acted on a just-in-case? basis and taken out extra funds to support themselves through any post-Brexit instability, he added.

continuous change may disrupt small business and force entrepreneurs to overhaul business plans. Many small business owners that are basic-rate taxpayers may face difficulties when looking to grow their businesses.

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