If you run a company, remember dividend payments can provide a tax-efficient remuneration strategy, the rate of tax paid on dividends being different from other income. Basic rate taxpayers pay 7.5%, higher rate taxpayers pay 32.5% and additional rate taxpayers pay at 38.1%: tax on other income is paid at 20%, 40% and 45%.
Timing is key
When paying a bonus to directors, or dividends to shareholders, timing can be critical.
Date of payment affects when tax is due, and probably the rate at which it is payable, so deciding whether to make payment before or after the end of the tax year needs consideration. Careful judgment may also be required when deciding whether a bonus or dividend is more tax efficient. Please contact us to review your particular circumstances.
Consider the payment of a pension contribution by the company. These are usually free of tax and NIC for the employee (see also Pensions section). Provided the overall remuneration package is justifiable, the company should also get tax relief on the contribution.
In many family companies, director-shareholders often have ‘loan’ advances made by the company – such as personal expenses paid by the company. These are accounted for via a ‘director’s loan account’ with the company.
Loan accounts can become overdrawn, and where the overdrawn balance at the end of the accounting period is still outstanding nine months later, a tax charge arises on the company. For loans made on or after 6 April 2016, this is an amount equal to 32.5% of the loan, but where the balance is repaid, there is no tax charge.
HMRC are keen to ensure these rules are not manipulated. If you are concerned whether the tax charge could apply to your company, we would be happy to advise.
‘Trivial’ benefits can be far from trivial
The directors of close companies can receive up to £300 of ‘trivial benefits’ in a tax year. You can’t get £300 in one go: they are limited to a value of (up to) £50 a time. Examples include a meal out, plants from the garden centre, a gift card, a bottle of wine, a Christmas present – items enhancing any remuneration package.
Trivial benefits must not be a reward for services, a contractual entitlement, cash, or a cash voucher. This means a voucher that can be exchanged for cash: not a voucher that can be exchanged for goods or services.
If you haven’t used your annual trivial benefit limit, there is still time to make a very beneficial end of year top-up.