SMEs paid out 94% of profits as dividends, up from 63% last year

UK corporate SMEs paid out 94% of their profits as dividends last year, up from 63% the year before, says top ten accountancy firm Moore Stephens.

Total dividend payments made by UK SMEs increased to £28.3bn in 2015-16, up from £17.5bn in 2014-15, ahead of significant changes to the taxation of dividends.

Moore Stephens explains that SME business owners will generally have to pay higher taxes on dividends due to changes announced by George Osborne in the July 2015 post-election Budget. Its view is that these changes will significantly increase the tax burden for businesses and make it more difficult for business owners to manage their finances effectively.

Whilst the government have introduced an allowance which means that the first £5k of dividend receipts in a tax year will now go untaxed, business owners and other taxpayers receiving dividends will have to pay a higher marginal tax rate on the remainder, applying from 6 April 2016.
The revised tax rates on dividends are as follows:

– Basic rate taxpayers now have to pay 7.5%, when they were previously not liable to taxation.
– 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:

“The changes could distort business owners’ behaviour and affect how they manage their finances.

“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.

“Politicians need to use tax policy to help entrepreneurs, rather than hinder them. Continuous changes may disrupt small businesses and force entrepreneurs to overhaul their business plans.

“Entrepreneurs want to see future governments encouraging their businesses to grow by reducing tax on dividends. 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.

“It is possible that the uncertainty over the Brexit vote also contributed to the rise in profits paid out as dividends by SMEs. Some business owners may have acted on a just-in-case basis and taken out extra funds to support themselves through any post-Brexit instability.”

Net profits of UK SMEs have grown far more slowly than dividend payments…

…which means the percentage of profits SMEs have taken as dividends has grown rapidly. The percentage of profits paid out as dividends is illustrated in the following chart: