Bonus v dividend tax planning

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:

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.

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