Accounting question?

[srebbe64]

For quite some years now my accountant has advised me to pay myself by way of Bonus rather than Dividend. Clearly, the higher my bonus the lower the company's profit, so Corp Tax is reduced. He reckons I'm about 2% better off paying myself by bonus.

My question: because the numbers are always going to be regular, is there a graph somewhere that shows the Tax benefits (or otherwise) of Dividend Vs Bonus to a shareholder and Director - on a sliding scale?

[Eric Mc]

I've never seen such a graph. I actually think that this has become a very difficult question to answer these days. There are now quite a variety of tax treatments between different types of companies - small close trading companies, not-small close trading companies, trading companies which are not "close companies" both large and small, non-trading companies, small close rading companies with profits under £10,000 which issue dividends to shareholders who are people (as opposed to other companies).

Gordon Brown has done more to make tax incomprehensible than any chancellor in history.

[TSS]

I think it can be tax efficient to pay a small bonus (£4-5K) once a year to use up your tax free allowance then pay the rest in dividends. Perhaps that’s what your accountant means.

[Eric Mc]

If you have no other sources of income outside your own company, then paying yourself a Director's Salary up to the lower National Insurance limits and paying yourself any additional income through dividends is pretty bog standard accountancy/tax advice. However, in certain companies it may not be possible to do this (e.g. IR35 restrictions) or it may not be possible if you are already earning another salary or have a pension income of some sort from elsewhere.

If your company generates large taxable profits and pays corpoartion tax at 40% it may be worthwhile giving yourself additional salary - depending on your own personal tax situation.

By and large however, avoiding bonuses is usually more tax efficient than paying bonuses.

[Jaglover]

srebbe64 said:

For quite some years now my accountant has advised me to pay myself by way of Bonus rather than Dividend. Clearly, the higher my bonus the lower the company's profit, so Corp Tax is reduced. He reckons I'm about 2% better off paying myself by bonus. My question: because the numbers are always going to be regular, is there a graph somewhere that shows the Tax benefits (or otherwise) of Dividend Vs Bonus to a shareholder and Director - on a sliding scale?

For a small company you are likely to be better off with a small salary (using up your PA) and paying the rest of the profit out in dividends (which as a basic rate tax payer) will result in no additional tax liability

For you it is a different situation.

From your descriptions of the size of the business and its profitability I imagine you are paying CT at 30%, hence your salary is attracting tax relief at 30%.

Moreover if you go the dividend route you will face an additional liability in any case as a higher rate tax payer (taxed at 32.5% with the same 10% tax credit)

Therefore it may well be correct that you are better off going down the Salary route.

I would suggest though that you ensure that your accountant re-performs the calculation every year, to ensure that the correct tax treatment is being followed.