The dividend or bonus decision

Post by Mearns & Company in News

If you are a company owner director, the choice between dividend and bonus has changed.

‘Tax laws and rates can change’. Those words, or something similar, appear in many financial advertisements, but if you are a company director, you may feel that ‘tax laws and rates always change’ is more appropriate.

As the calendar year ends – and with it many companies’ financial years – tax changes are moving back into the spotlight. Since December 2022 directors have seen:

• the dividend allowance cut in half (and a similar cut to the capital gains tax annual exempt amount);
• the additional rate (top rate in Scotland) tax threshold fall from £150,000 to £125,140;
• corporation tax rates increase for companies with profits exceeding £50,000 a year;
• the 130% super-deduction for plant and machinery investment replaced with a new, temporary, 100% capital allowance;
• employer and director national insurance contribution rates reduced;
• increases to the pensions annual allowance and the phased abolition of the pensions lifetime allowance.

All those changes, which often interact with each other, mean that the most tax-efficient way to draw profits from a company with a 31 December year end may differ in 2023 from 2022.

Pension contributions?

In 2023 one option for dealing with profits that looks more attractive than in 2022 is an employer pension contribution. For some, any pension contribution may not have made sense in 2022, because at the time the lifetime allowance rules were still in force. If those rules have 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.

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 advice is vital before taking any action.

The value of your investment, and the income from it, can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

Occupational pension schemes are regulated by The Pensions Regulator.