Over recent years, the tax savings to be made from incorporating a business have often revolved around combining the low rates of corporation tax with the fact that there are no NICs payable on dividends. If a director/shareholder is a higher rate taxpayer, the benefit of paying a dividend or bonus is dependent upon the effective corporation tax rate of the company. How have the changes announced by Gordon Brown affected the position for 2007/08?
Christie is to receive a bonus of £60,000 after all taxes from his family company. He has a marginal income tax rate of 40% (32.5% if dividends) for 2007/08 and already has earnings above the employees’ upper earnings limit for NICs purposes so that any bonus will be liable to employees’ NIC at 1%. The company pays CT at the small companies’ rate of 20%. We have prepared the following comparison of the cost of paying a dividend rather than additional remuneration to Christie for the tax year 2007/08.
| Christie | Dividend £ |
Bonus £ |
| Dividend/remuneration | 80,000 | 101,695 |
| Less: National Insurance (1%) | 1,017 | |
| Add: Tax credit (1/9) | 8,889 | |
| 88,889 | ||
| Less: Income tax (@ 32.5% / 40%) | 28,889 | 40,678 |
| NET RECEIPT | £60,000 | £60,000 |
| Company | Dividend £ |
Bonus £ |
| Payment by company | 80,000 | 101,695 |
| Add: Employers’ NIC (@ 12.8%) | 13,017 | |
| 114,712 | ||
| Less: Tax relief (@ 20%) | ______ | 22,942 |
| COST TO COMPANY | £80,000 | £91,770 |
If the company pays CT at the full rate of 30%, the bonus route is slightly more expensive than the dividend route.
| Christie (figures as last example) Company |
Dividend £ |
Bonus £ |
| Payment by company | 80,000 | 101,695 |
| Add: Employers’ NIC (@ 12.8%) | 13,017 | |
| 114,712 | ||
| Less: Tax relief (@ 30%) | ______ | 34,414 |
| COST TO COMPANY |
£80,000 |
£80,298 |
If the company has profits above £300,000 before a bonus is deducted, the marginal rate of CT is 32.5% and so the cost to the company of a bonus is less than the cost of a dividend ie:
| Company | Dividend £ |
Bonus £ |
| Payment by company | 80,000 | 101,695 |
| Add: Employers’ NIC (@ 12.8%) | 13,017 | |
| 114,712 | ||
| Less: Tax relief (@ 32.5%) | ______ | 37,281 |
| COST TO COMPANY | £80,000 | £77,431 |
By 2009/10, the CT rates are expected to be 28% main rate, 22% small companies’ rate giving a marginal rate of 29.5%. The costs of a bonus in any of these scenarios will be:
|
22%
|
28% | 29.5% | |
| Cost of bonus before tax relief | 114,712 | 114,712 | 114,712 |
| CT relief |
25,237 |
32,119 |
33,840 |
| Cost to company |
89,475 |
82,593 |
80,872 |