WORCESTERSHIRE accountancy firm Bishop Fleming says a key change to the taxation of dividends next April will disproportionately hurt small business owners.

Andrew Browne, head of tax at the College Yard firm, says since April 2016, company owners wanting to pay themselves a dividend out of the taxable profits they generate paid a tax charge, ranging from 7.5 per cent up to 38.1 per cent, depending on their level of income. The measure was introduced by then Chancellor George Osborne with no prior consultation. The worst hit by the tax are those people running small businesses, who have suffered proportionally the largest increase in tax, at a time when the economy should have been encouraging them to grow their companies, Mr Browne says.

From April 2018, the allowance that is set against dividend income before the balance is taxed, will drop from its current £5,000 - only introduced in 2016 - to just £2,000, meaning shareholders will be even worse off by £225, £975 or even £1,143 a year depending on the rate of tax they pay. For a couple who share the running of their company, this extra tax will double to £450, £1,950 or £2,286 per year.

Mr Browne, said: "The dividend tax creates a double whammy - it penalises the very people we should be encouraging to grow successful businesses, and removes money from the economy that would otherwise help to support growth.

"Slashing the dividend allowance unfairly widens the tax net without changing the rate of tax, which is not a transparent way of increasing people's tax liabilities."

"I would urge the chancellor in the budget to re-think cutting the dividend allowance, and send out a positive message to SMEs that their efforts are appreciated in boosting the UK's enterprise culture."

"Provided the company has sufficient distributable profits, business owners should consider accelerating a dividend payment to before 6 April 2018 to benefit from the current £5,000 dividend allowance before it falls."