The end of the tax year is drawing near and many owner-directors of companies are putting their minds to deciding which is more tax-efficient: a bonus or a dividend.
Tax laws and rates that will affect your decision have changed since 2022:
- The dividend allowance has been halved, from £2,000 to £1,000 (with a similar cut to the capital gains tax annual exempt amount).
- The additional rate (top rate in Scotland) tax threshold has fallen from £150,000 to £125,140. Corporation tax rates have increased for companies with profits of more than £50,000 a year. The 130% super-deduction for plant and machinery investment has been replaced with a temporary 100% capital allowance.
- National insurance contribution rates have been reduced for directors and employers.
- The pension annual allowance has increased to £60,000 and the abolition of the pension lifetime allowance is being phased in.
All these changes, which interact with each other, mean that the most tax-efficient way to draw profits from a company with a 31 December year end is likely to differ in 2023 from 2022. For example:
| 2022 | 2023 | |||
| Dividend £ | Bonus £ | Dividend £ | Bonus £ | |
| Marginal profit | 10,000 | 10,000 | 10,000 | 10,000 |
| Employer’s NICs | – | (1,269) | – | (1,213) |
| Bonus | – | 8,731 | – | 8,787 |
| Corporation tax | (1,900) | – | (2,463) | – |
| Net profit | 8,100 | – | 7,538 | – |
| Dividend | 8,100 | – | 7,538 | – |
| Director’s NICs | – | (238) | – | (176) |
| Income tax | (2,734) | (3,493) | (2,544) | (3,515) |
| Net income | 5,366 | 5,000 | 4,994 | 5,097 |
Totals may not sum due to rounding.
Assumptions:
- Company’s gross profits between £60,000 and £250,000, hence the £10,000 of marginal profit is subject to marginal relief, pro-rated for the split tax year.
- Director is a 40% taxpayer (33.75% on dividends) with their dividend allowance used elsewhere.
- NIC Employment Allowance is not available.
This example is specific to a 31 December year end – if your company’s year end is 31 March, then the 2023 net dividend amount would be lower because there would be a higher charge to corporation tax. The bonus figures would not change.
Pension contributions?
An employer pension contribution could be a more attractive option for dealing with profits in 2023 than in 2022. For some, pension contributions may not have made sense in 2022, because the lifetime allowance rules were still in force. These essentially limited the amount you could hold in your pension scheme. If those rules prevented you and/or your company from making pension contributions in recent years, this financial year end could be the ideal time to catch up.
There is no lifetime allowance charge in 2023/24 and the lifetime allowance is abolished entirely from 6 April 2024, meaning that you, or your company, can add as much as you like to your pension scheme. While they have to be justified, employer pension contributions can be significant, and would benefit from full corporation tax relief at the new, higher rates. In practice, the complexities of pensions alongside all those other tax changes mean it is vital to seek advice before taking any action.