Salary v Bonus v Dividends

If you are a small business owner and you are thinking about paying yourself more in the next tax year starting 6th April 2010, you need to talk to your tax adviser or financial planner on the following points:

  • If your income exceeds £100,000 you will reduce your annual personal tax allowance by £2 for every £1 over £100,000 which could mean you end up with a effective tax rate of up to 60% on your income between £100,000 and  £112,950. You then pay 40% tax on the income between £112,950 and £150,000
  • If your income exceeds £150,000 you will pay 50% income tax on your income above this level or if the income is from dividends the rate will be 42.5%
  • All National Insurance rates will increase by 0.5%

This means that you may prefer to take a bonus, as you can decide when it is paid. If so, make sure you take it before the 6th April 2010 as it would still be subject to the lower rate of 40%. However you will have to pay and tax and NI in April 2010.

Normally unless your company is making in excess of £300,000 in profit annually, dividend payments are usually a better option than a bonus or salary increase as no NI is payable. Any dividends taken in March 2010 will only mean extra tax at 42.5% ( if your income exceeds £150,000) due in January 2011.

Given the current rate of Capital gains tax at only 18% there is a large difference between this and income tax and so investments and how they are taxed should also be looked at.

If you are a small business owner it is fairly likely that you are paying more tax than you need to and so require tax help.

A tax review of your company and personal tax and the interaction between them before April may help.