Making the dividend or bonus decision

The end of the tax year is drawing near and many owner-directors of companies will turn their minds to deciding which is more tax-efficient: a bonus or a dividend.

Tax laws and rates that will affect your decision have changed since 2022:

• The dividend allowance has been halved, from £2,000 to £1,000 (with a similar cut to the capital gains tax annual exempt amount).
• The additional rate (top rate in Scotland) tax threshold has fallen from £150,000 to £125,140.
• Corporation tax rates have increased for companies with profits of more than £50,000 a year.
• National insurance contribution rates have been reduced for directors and employers.
• The pensions annual allowance has increased to £60,000 and the abolition of the pensions lifetime allowance is being phased in.

All these changes, which interact with each other, mean that the most tax-efficient way to draw profits from a company is likely to differ in 2023 from 2022.

Pension contributions?

An employer pension contribution could be a more attractive option for dealing with profits in 2023 than in 2022. For some, a pension contribution may not have made sense in 2022, because the lifetime allowance rules were still in force. These essentially limited the amount you could hold in your pension scheme. If those rules 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.

There is no lifetime allowance charge in 2023/24 and the lifetime allowance is abolished entirely from 6 April 2024, meaning that you, or your company, can add as much as you like to your pension scheme. 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 other tax changes mean it is vital to seek advice before taking any action.