Dividend or Bonus (PAYE) ?

Charterbridge

googleplus linkedin

Dividend or Bonus (PAYE) ?

Dividend or Bonus? 

The change in the top rate of income tax has not altered the bonus or dividend decision: if you have the choice, then almost invariably a dividend is the less taxing alternative.

Income Tax Rate 20% 40% 45%
Div
£
Bonus
£
Div
£
Bonus
£
Div
£
Bonus
£
Marginal gross profit 10,000 10,000 10,000 10,000 10,000 10,000
Corp. tax -2,000 -2,000 -2,000
Dividend 8,000 8,000 8,000
Employer’s NICs -1,213 -1,213 -1,213
Gross bonus 8,787 8,787 8,787
Director’s NICs -1,054    -176    -176
Income tax – 889 -1,757 – 2,889 -3,515 – 3,333 -3,954
Tax credit   889   889   889
Net benefit 8,000 5,976 6,000 5,096 5,556 4,657

This table assumes that:

– £10,000 of marginal gross profit is available to draw for a sole director/shareholder in 2013/14;
– NICs: 20% taxpaying director are 12%, whereas for 40% & 45% taxpaying directors NICs are 2%;
– Employer’s NICs are 13.8%;
– The company has a December 31 year end;
– The company’s corporation tax rate is 20%; and
– IR35 rules (personal service companies) rules do not apply.