Bonus or Dividend
in Cutting tax
2 replies 199 views
in Cutting tax
I take a monthly dividend from my company and the occasional extra dividend when possible. It's been suggested that taking a bonus instead of the extra dividend might benefit me and the company (Private Limited Company). I was told that the bonus could be the company paying for a car or a holiday for example. I was thinking on a £5-6k holiday paid for by the company. I realise I would need to pay the tax part of the bonus but what other benefits are there to doing this ? I could just take a £6k extra dividend. Appreciate any advice. Thanks.
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A holiday paid for by the company would be quite unusual and give rise to a BIK liability the same as if you'd taken cash payment (salary) of the value of the holiday.
A company car is more common, but you will then be liable for BIK based upon the CO2 rating and the original purchase value (list price) of the car when it was new - so a £6k (used) car will have the BIK determined based on a much higher value. Unless the car is an EV (where the BIK is very low currently), this is unlikely to be cost-effective.
How do you currently take drawings from the Ltd Co, other than from the dividend?
A common approach is to take a salary of around £1k per month (using personal allowance), and thus making some NI contributions, so eligible for the pension accrual ("stamp") for the year. Some also take less salary, but still enough to qualify for the NI stamp - this can be particularly helpful if there are other income sources that use the remainder of personal allowance.
Dividends can only be paid from retained profits, and will be paid out after corporation tax has been paid by the Ltd Co.
Taking monthly dividend (so it looks more like a salary) can be open to more scrutiny.
Do you have an Accountant? They should be able to advise on the effective way to take drawings, having consideration for your full circumstances.
For a Ltd Co. to make payments to an owner-Director where the payment looks like the individual is mixing business and personal expense can be open to more scrutiny.
A common choice for owner managed companies is to pay a salary above the lower earnings limit but below the secondary class 1 threshold, which is sufficient to qualify for pension purposes, but avoids both employer and employee NIC.
The devil is in the detail with companies paying for holidays, as per HMRC:
The best option is for the employer to pay and be the customer, so only class 1A NIC is payable.