HMRC started writing to some company owners from 4 February 2024 to inform them that they may have underdeclared dividend income. This is one of HMRC’s…
This article was first published in Dorset Business Focus magazine.
Now the Christmas tree is back in the loft, it’s time to think about the year ahead – and perhaps consider some pre-tax year end planning.
For business owners, the age-old question of ‘should I take a bonus or dividend?’ is likely to arise. Unfortunately, the answer is it depends.
Generally speaking, dividends are currently more tax efficient than bonuses. But after April 5, if your company pays Corporation Tax at the 25% rate and the amount you wish to take from the company falls entirely into the additional rate tax band (currently over £150,000, reducing to £125,140 after April 5), there is very little difference tax wise between a bonus and a dividend. In these circumstances, the overall effective tax rates for a dividend and bonus are 51% and 53% respectively in the current tax year, and 55% for both thereafter.
For those who don’t pay employee’s National Insurance, a bonus will be better after April 5, as the NI saving tips the balance. However, whilst the tax position is important, there are other considerations such as cashflow.
Tax on bonuses is deducted at source, whereas tax on dividends is collected via a self-assessment tax return. Therefore, if a dividend is paid at the end of March 2023, the tax is payable by the end of January 2024. However, HMRC will assume that your tax liability will be the same as the current tax year and calculate payments on account accordingly. It is, though, possible to reduce these if income levels are likely to fall.
If you have taken dividends of between £125,140 and £150,000 in the current tax year, topping them up to £150,000 before April could help you keep below the £125,140 threshold next year. The tax saving may just help towards next Christmas.
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