If the payment of bonuses to directors or dividends to shareholders is under consideration, give careful thought as to whether payment should be made before or after the end of the tax year. The date of payment will affect the date tax is due and probably the rate at which it is payable.
For many director-shareholders, the tax cost of receiving a dividend this tax year will be higher than the receipt of a dividend last year but generally a dividend will still be more tax effective than paying a bonus. Other tax issues may also need to be considered such as the loss of some or all of the personal tax allowance if total ‘adjusted net income’ exceeds £100,000.
Please contact us before you make any decisions about changing the amount of dividends taken so that we can advise on the best approach for you.
Consider the payment of a pension contribution by the company. This is generally tax and NIC free for the employee (but see Pensions section). Furthermore, the company should obtain tax relief on the contribution, provided the overall remuneration package is justifiable.
It is common in family companies for a director-shareholder to have ‘loan’ advances made to them by the company (eg personal expenses paid by company). These are accounted for via a ‘director’s loan account’ with the company which may become overdrawn.
Where the overdrawn balance at the end of an accounting period is still outstanding nine months later, a tax charge arises on the company. The tax charge increased from an amount equal to 25% of the loan to 32.5%, for loans made on or after 6 April 2016. Where the balance is repaid there is no tax charge.
Complex rules exist to catch certain arrangements, for example where loan balances are repaid but shortly afterwards the company provides another loan to the shareholder. These rules do not apply where there is a genuine repayment through the award of a valid bonus/dividend.
If you are concerned about whether the tax charge could apply to your company, we would be happy to review this area.