If your company has a December 31 financial year end, now is the time to start thinking about how to draw out your 2009 profits. On this occasion there is a variety of new factors you may need to consider when arriving at a decision:

• For now the government is not taking any action on income-shifting (eg paying dividends to a spouse), but the subject remains under review and could change.
• The maximum that your company could tax-efficiently put into a pension on your behalf may have been constrained by the special annual allowance rules introduced in the 2009 Budget.
• The corporation tax rate for small companies increases to 22% from 1 April 2010.
• Next year you may be facing a higher marginal rate of tax. Not only does the top rate of income tax rise to 50% (42.5% for dividends) above £150,000, but there is also the start of the claw back of personal allowance, creating an effective 60% marginal tax band on income between £100,000 and about £113,000.
• There may be other tax increases in 2010/11, aside from the three mentioned above. The combination of parlous government finances and an early post-election Budget makes this a serious risk.

The table below shows the mathematics of your current bonus/dividend/pension choice, based on £10,000 of gross profit. It assumes that your company's corporation tax rate is 21% and that you are a higher rate taxpayer, unaffected by the special annual allowance charge.

Bonus, Dividend or Pension Contribution?
	Bonus £	Dividend £	Pension
Marginal gross profit	10,000	10,000	10,000
Pension contribution	N/A	N/A	10,000
Corporation tax	N/A	(2,100)	N/A
Net dividend	N/A	7,900	N/A
Employer's National Insurance Contributions (NICs) £8,865 @ 12.8%	(1,135)	N/A	N/A
Gross bonus	8,865	N/A	N/A
Director's NICs £8,865 @ 1%	(89)	N/A	N/A
Income tax	(3,546)	(1,975)	N/A
Benefit to director	5,230	5,925	10,000

The table underlines the current attractiveness of dividends compared with bonuses, at least where the personal service companies rules (IR35) are not an issue. The table also highlights the appeal of a pension contribution, although it should be remembered that, as a general rule, 75% of any pension contribution will ultimately provide a taxable income, while the other 25% produces a tax-free lump sum.

ACTION

Do not delay on your company year end planning. The month of December (with a VAT rate change at the very end) is likely to be a busy one. It is best to make your decisions before the final month rush gets under way.

Make sure you book an early consultation with us – December can be a hectic month for us, too.

 

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This news item is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at August 2009. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.

Burley Financial Services Ltd is a private limited company registered in England and Wales under company no. 121 7536.
Burley Financial Services Ltd is authorised and regulated by the Financial Services Authority.
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