Dividend payouts hit £28.3bn to avoid tax change

A rush to avoid the cut in the annual dividend allowance to £5,000 have seen a surge in the volume of profits taken out of businesses as small business owners paid out a record percentage of profits before the April deadline

Small to medium-sized businesses (SMEs) paid out 94% of their profits as dividends last year, up from 63% the year before, reveals figures from accounting firm Moore Stephens.

Total dividend payments increased to £28.3bn in 2015-16, up from £17.5bn in 2014-15, ahead of significant changes to the taxation of dividends, which came into force this April. This represents a 62% increase on dividends paid over the previous year.

The new allowance system means that the first £5,000 of dividend receipts in a tax year will now go untaxed, but business owners and other taxpayers receiving dividends will have to pay a higher marginal tax rate on the remainder, applying from 6 April 2016.

Basic rate taxpayers now have to pay 7.5%, when they were previously not liable to taxation, while higher rate taxpayers have to pay 32.5%, in contrast to the previous effective 25% rate. Additional rate taxpayers now pay 38.1%, instead of an effective 30.56% rate.

Mike Cooper, partner at Moore Stephens, said: ‘Ahead of the changes, SME owners reduced reinvestment into their businesses in 2015-16 compared to the previous year, and the changes will continue to have an impact on future plans.

‘From now on, business owners will have to take out a higher percentage of profits in order to maintain the same post-tax income.

‘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.’

Essential reading

Find out more about the dividend tax changes at Dividend taxation: how the new tax regime will affect owner managers

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