Surge in dividend payments ahead of tax changes

The vast majority of profits made by small and medium-sized enterprises (SMEs) in 2015-16 were paid out as dividends, as business owners scrambled to avoid the cut in the annual dividend allowance to £5,000 from April.

Combined dividend payments soared to £28.3bn in 2015-16, up from £17.5bn in 2014-15, due in no small part to the significant changes in the taxation of company dividends.

The new tax-free Dividend Allowance means that you won’t be required to pay tax on the first £5,000 of your dividend income, regardless of what non-dividend income you have. However, business owners and other taxpayers receiving dividends will have to pay a higher marginal tax rate on the remainder of their dividend income above £5,000, applicable from 6th April 2016.

Basic rate taxpayers now have to pay 7.5 per cent tax when previously they weren’t liable at all to taxation. Meanwhile higher rate taxpayers must pay 32.5 per cent, up from the previous 25 per cent rate.

Furthermore, additional rate taxpayers will now be charged 38.1 per cent tax, as opposed to an effective 30.56 per cent rate.

Mike Cooper, partner, Moore Stephens, said: “Ahead of the changes, SME owners’ reduced reinvestment into their business 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.”

HM Revenue and Customs (HMRC) has published a list of scenarios that may resonate with your own personal circumstances. If you’re confused about what the new Dividend Allowance means for you, click here to learn more about the way the allowance works in certain situations.

Last updated: 4th August 2016