More than a quarter of SME owners plan pay-outs ahead of tax hikes, but not in Scotland
More than a quarter (28%) of SME owners across the UK are planning to pay themselves a special dividend ahead of the forthcoming tax hikes in April, according to a survey of owner managed businesses (OMBs) by accountants and business advisors Scott-Moncrieff. However, in Scotland, the number of OMBs planning a pre-April payout is just 3%.
The nationwide rush of dividend payments allows 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 for additional-rate taxpayers, the rate will increase from 30.56% to 38.10%, a dividend tax hike of some 7% for all middle and high rank earners.
Paul Renz, tax partner at Scott-Moncrieff, said: “Business owners are moving quickly to take money out at a lower tax rate, but businesses in Scotland don’t seem to be taking the same action.”
“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 miss out on the savings, but they still have time to act.”
“The changes to dividend tax will hit business owners very hard – many are on relatively modest levels of income.
“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.”
“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.”
Business owners taking a pay cut – more than a fifth expect to slash dividends
Scott-Moncrieff’s survey also reveals that over 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.
Renz added: “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.”
“This makes it even more important that they think seriously now about whether to mitigate some of the impact these changes will have on their income levels next year.”
However, Scott-Moncrieff points out that despite these changes, dividends remain an important component in tax-efficient remuneration for many business owners.
Renz concluded: “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.”