SMEs pay out 94% of profits as dividends, says new report

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UK SMEs paid out 94% of their profits as dividends last year, a significant proportion in comparison to 63% the previous year, according to accountancy firm Moore Stephens. Total dividend payments made by UK SMEs increased to £28.3 billion in 2015-16, up from £17.5 billion in 2014-15.

Despite an allowance meaning that the first £5,000 of dividend receipts in a tax year will now be untaxed, the changes will increase the tax burden for businesses as the remainder will now be taxed at a higher rate, with increases of 7.5% on average for tax on dividends, in effect from 6 April 2016.

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.”

Cooper added that concern ahead of the EU referendum may have contributed to the increase. “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,” he said.