There is always considerable discussion on the merit of paying dividends or bonuses in family or sole proprietor owned director/shareholder companies.
Typically, articles highlight the factors to be considered and the risks but then poorly illustrate the tax savings. So, I have done just the opposite.
I have taken just one scenario, illustrating the £695 saving available on a £10,000 bonus or dividend payment to a higher rate tax payer (basic rate tax payers save £1,783).
Before my illustration, I include a list of just some of the issues to consider:
- the minimum wage
- national insurance contributions
- pension savings and retirement contributions
- qualifying state pension earnings
- director income tax brackets
- available company profit
- shareholder control
- tax avoidance rules
So here is the comparison:
| Bonus £ |
Dividend £ |
|
| Director/shareholder profit | 10,000 | 10,000 |
| Corporation tax [£10,000 @ 21%] | (2,100) | |
| Dividend paid | 7,900 | |
| Employer’s NIC on bonus | (1,135) | |
| Employee’s gross bonus | 8,865 | |
| Employee’s NIC | (89) | |
| Income tax on bonus | (3,546) | |
| Income tax on dividend | (1,975) | |
| Net amount | 5,230 | 5,925 |
| Cash saving | 695 |
If you wish to discuss making sole trader, partnership of director/shareholder tax savings then please feel free to contact me by email or phone.
copyright ©2009
This article is for discussion purposes only and does not represent advice on which you should act without consulting a professional as tax legislation is complex and changes frequently.