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If you manage and own shares in, a private limited
company, then assuming that your company has profits to spare, you will no
doubt be seeking advice at some stage - do I take a bonus (extra salary) or
a dividend? (a payment based on shareholding.)
We have assumed in the conclusions we have reached
below that you already take a commercial salary for the work you undertake
for the company.
A bonus will be subject to your highest rate of tax,
plus employee's and employer's National Insurance Contributions. Dividends
are a return on your investment in the business - you will pay tax on the
amount received but no National Insurance!
Logically it would seem to be a simple decision, take
a dividend, no extra NIC to pay. Unfortunately logic and tax planning do
not always go hand in hand! There may be circumstances when a bonus is
preferable to a dividend. One way to demonstrate this apparent
contradiction is to examine the outcomes when the company pays corporation
tax at different rates.
Post the 1 April 2006 your company will pay
corporation tax at:
- the small companies rate of 19%,
- the full rate of 30%, or
- a marginal rate of 32.75% if your profits lie between
£300,001 and £1.5m. (This assumes your company is not associated with
other companies for tax purposes. Please call if you need
clarification on this point)
Dividends not bonuses:-
Dividends will generally be more tax effective than
bonuses if your company pays corporation tax at 19%
Dividends are also marginally better than bonuses if
your company pays tax at the full rate of 30%.
Bonuses not Dividends:-
Bonuses will produce a slightly lower overall tax and
National Insurance cost if your company pays tax at the marginal rate of
32.75%.
The difference in the outcome when corporation tax is
paid at 32.75%, is mainly due to the extra corporation tax relief that the
company receives on the gross bonus paid and the employer's NIC.
One exception in particular should be noted.
Shareholders paying tax at basic rates or lower.
Dividends are paid to shareholders less a 10% tax
credit. If the shareholder pays tax at no more than the standard rate
then no additional income tax is due. Under these circumstances it will
always be more beneficial to receive a dividend - even if the company pays
corporation tax at 32.75%.
Remember that there are other factors that will
influence the appropriate route. For example, dividends do not count
as earnings for pension premium purposes; and you might not be able to pay
dividends to individuals in the same proportions that you would like to
allocate a bonus and it is vital to get the administration correct!
If you would like us to review the opportunities for
your company please call.
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