Dividend or bonus?
Right now is a good time for companies with a year-end of 31 December to decide if any further company profits should be withdrawn, and, if so, whether it should be done by way of dividend or a bonus.
If your aim is just to minimise tax, taking a dividend is now always more tax-efficient than paying a bonus – especially if your company pays corporation tax at only the 20% small profits rate.
The recent reductions to the rates of corporation tax have reinforced the tax-efficiency of taking dividends, although the main saving comes from avoiding National Insurance Contributions (NICs) – a combined employee/employer minimum of 15.8% when a bonus is paid.
With that in mind, let’s crunch some numbers: the table shows how much cash you would take home from withdrawing an additional £10,000 of profit given different levels of personal income (assumed to be entirely director’s remuneration), and a 31 December year-end.
Personal income |
Corporation tax |
Corporation tax |
||
Bonus |
Dividend |
Bonus |
Dividend |
|
£25,000 |
£5,976 |
£8,000 |
£5,976 |
£7,438 |
£50,000 |
£5,096 |
£6,000 |
£5,096 |
£5,579 |
£200,000 |
£4,218 |
£5,111 |
£4,218 |
£4,752 |
The difference is most marked where personal income is just £25,000, since at this level employee NICs at 12% come into the mix. Dividends also come out on top when the timing of tax liabilities is considered. For a bonus paid in December, the related PAYE/NICs will be due on 22 January 2013. There will be a reduction in the company’s corporation tax liability, but the benefit will not be felt until 1 October 2013. A dividend will fall into the 2012/13 tax year, so any additional liability is not due until 31 January 2014. However, if dividends are taken on a regular basis the payment on account rules will accelerate tax payments.
So is the case for dividends cut and dried? Not quite, as paying a bonus can have some advantages. Firstly, dividends must be paid in proportion to shareholdings – fine if you own 100% of the company, but it could cause problems where this is not the case. Then there is the problem that dividends do not count as pensionable earnings, which is not an issue if you already have sufficient earnings for your pension requirements, or if the company is making contributions on your behalf. As far as the need to raise a personal mortgage is concerned, lenders these days are generally aware of how owner-managed companies operate and should treat dividends and bonuses equally.
This is not a straightforward decision, so please contact us for advice.