Bonuses can now be more tax efficient than dividends
26th October 2022
Posted in Articles by Phil Skrynski
The issue
Well, it has been a couple of turbulent weeks at the HM Treasury with tax changes and U-turns. The current position is that dividend rates will not be cut (the previously introduced 1.25% hikes will stay), corporation tax rises are now still going ahead (increase in rate from 19% to 25% from 1 April 2023) but the 1.25% cut to national insurance rates will remain. But where does this leave us as far as the dividend v bonus argument is concerned? Based on our calculations, in certain circumstances it seems that the tide has finally turned and bonuses can be more tax-efficient than dividends.
Example
Let us look forward to 2023/24 and consider Bob who has a salary of £60,000 (and also holds some shares in his employer company) and receives dividends from a share portfolio of £3,000. The company is paying corporation tax at 25% and is prepared to give Bob £20,000 of pre-tax profits either by dividend or bonus (whichever is the most tax-efficient).
As you can see Bob retains more cash after receiving a bonus rather than a dividend. The results are also similar at the additional rates.
Forbes Dawson view
The old adage that dividends are more tax efficient than bonuses has now been consigned to the dustbin and everything should be looked at based on first principles. As we stated in our tax bite last September, marginal tax rates can be as high as 55.5% and it is likely that these can be reduced by paying bonuses. Although this is counter intuitive, due to high rates of employer national insurance, this can open the door to other non-tax advantages. For example, lenders are generally more likely to lend against salary, rather than dividends, and also salary can reward particular contributors in a more focused way (although different share classes can be used to do this with dividends). We anticipate that we will be asked to undertake a number of remuneration reviews for clients in the run-up to the new tax year.
