In a recent survey, carried out by Scott-Moncrieff, more than a quarter (28 per cent) of SME owners across the UK told us that they are planning to pay themselves a special dividend ahead of the forthcoming tax hikes in April.
But not, it seems, in Scotland. North of the Border, the proportion of owner managers planning a pre-April payout was just 3 per cent. Why is that? You can be assured it’s not because they’re all too flush to worry about the future tax hike.
It’s hard to pinpoint exactly why there is such a significant disparity between Scottish business owners and those in the rest of the UK, and there are probably a range of reasons for the difference in approach.
However, anecdotal evidence suggests that it could be partly attributed to a cultural issue. In Scotland, it seems we are traditionally less aggressive in our approach to tax planning, and the further from London you get, the more accepting we become with regard to tax changes, as the 3 per cent figure suggests.
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 per cent, and for additional-rate taxpayers, the rate will increase from 30.56 to 38.1 per cent – a dividend tax hike of some 7 per cent for all middle and high rank earners.
Providing the accumulated profits are there, taking money out at a lower tax rate is a perfectly sensible move and, undertaken in the right way, is something that HM Revenue & Customs has absolutely no issue with. SME owners who do not pay a special dividend before 6 April may miss out on the savings, but they still have time to act.
The changes to dividend tax will hit business owners very hard – as 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 could sensibly be extracted before the 6 April deadline.
Even if business investment is being planned, taking a larger dividend now could still make sound financial sense. Owner-managers can always reinvest their dividend payouts as a loan back to the business, which would then be non-taxable when it was repaid.
Our survey went on to reveal a double whammy come April – that over a fifth of small business owners will reduce their dividend payouts once the changes come into force in April, while just 6 per cent expect to increase dividends to maintain their net income.
This signals 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. As a result, it is even more important to think seriously now about whether to mitigate some of the impact these changes will have on income levels next year.
Despite these changes, dividends remain an important component in tax-efficient remuneration for many business owners. 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.
With just a couple of weeks or so before the end of the tax year, and the change in the dividend tax treatment, perhaps it’s time for Scottish owner managers to take some action.
• Paul Renz is a partner at accountant and business adviser Scott-Moncrieff