Home > Corporation Tax > Cutting Your Corporation Tax Liability Through Bonuses

Cutting Your Corporation Tax Liability Through Bonuses

By: J.A.J Aaronson - Updated: 4 Mar 2014 | comments*Discuss
 
Cutting Corporation Tax Liability

Corporation tax is paid on profits accrued by a limited company or unincorporated association. There are a number of expenses that can be offset against an organisation's corporation tax liability; one of the most important of these is any salary paid to employees or directors (see our article Cutting Your Corporation Tax Liability Through Expenses). Any salaries that are paid will reduce the net profit of the organisation and therefore, by definition, will reduce the amount that must be paid in corporation tax.

Sometimes, however, organisations have surplus profits that they wish to remove and give to employees. There is constant debate as to whether or not a bonus is the most tax efficient way of doing this. However, it is undeniable that in certain circumstances bonuses can be used to mitigate an organisation's liability for corporation tax.

Corporate and Personal Tax

In order to understand the potential tax benefits of bonuses, it is useful to look at the way in which profits are treated inside and outside the company structure. In the first instance, profits that remain within the company are still subject to corporation tax. However, once they are removed and given to individuals in addition to a salary, the responsibility for paying tax on this sum is passed to the recipient.

The tax that must be paid on the money alters from corporation tax to personal Income Tax. This can have highly beneficial results for the company's financial situation as tax relief is available on bonus payments.

A bonus is not, however, the only way of extracting surplus profits from a company. In a large number of smaller companies, those who own the organisation are also the key shareholders. This, of course, gives them an entitlement to dividends, although this entitlement is often forgotten. In the case of small businesses, individual owners' finances and the finances of the company are likely to be inextricably linked; this adds another dimension to the question of whether bonuses or dividends are the most tax efficient method.

Dividends and Bonuses

When looking at this question, it should be noted that dividends and bonuses are treated differently by the personal tax schedule. A bonus is, for tax purposes, counted as part of the recipient's salary, meaning that it is subject to income tax at the normal rate. Dividends, however, are entitled to a tax credit of 10%.

Furthermore, basic rate taxpayers are not required to pay the difference, meaning that dividends are essentially free of income tax for these individuals. If, however, the individual is a higher rate taxpayer, they will be required to pay the difference between the tax owed and the tax credit.

From a corporate point of view there are also a number of factors to be considered when choosing between bonuses and dividends. Primarily, these revolve around the fact that there are effectively three bands of corporation tax: a 'small business' rate of 20% for those with profits up to £300,000, and a main rate of 21% for those with profits over £1,500,000. Marginal relief is available for firms in the middle. From 1 April 2015 there will be only one coporation tax rate, this will be set at 20%.

This means that the gross amount available as a bonus or dividend (the equivalent amount before tax relief) will be different depending on the company's profits.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
are potential overage payments on a land sale subject to taxation before the payment has been made?
liz - 30-Nov-12 @ 6:13 PM
Share Your Story, Join the Discussion or Seek Advice...
Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Latest Comments
  • Lou
    Re: How Will My Second Job Be Taxed?
    Hi, I work full time my annual income is 25,000. I am considering taking a second job, how would this effect the amount of…
    14 November 2018
  • Rjrjrj
    Re: How Will My Second Job Be Taxed?
    Hi just need advice on my 2nd job im currently working full time @37 hrs per week min wage and maybe starting 2nd job @16 hrs…
    9 November 2018
  • carol
    Re: What is My Tax Code?
    I have one job permanent but get paid 32 weeks a year. another job in the same place zero hours contract, paid 35 weeks a year I would…
    9 November 2018
  • Ellie
    Re: How Will My Second Job Be Taxed?
    We are currently on working tax credits. My husband earns 8200 and has taken a zero hours job earning roughly 2000 a year .…
    7 November 2018
  • Mikey
    Re: Claiming Tax Relief on Mileage
    I work on building sites as an employee but get no mileage allowance or extra money to cover fuel and travel in my own vehicle.…
    7 November 2018
  • tink
    Re: Can Tax Allowance Be Claimed on Work Clothes?
    Hi I work in a school as a family support worker and travel all over the Wirral supporting them in the…
    6 November 2018
  • Hellc98
    Re: Should I be Paid Mileage Allowance?
    My employer has refused to pay my mileage as they say I have not put my odometer readings on the claim forms. I have…
    5 November 2018
  • Kelly
    Re: What is My Tax Code?
    Hi, I earnt 9k and got taxed 1.1k so far in this tax year as I was on 35k for 3 months. Then I had 3 months of unemployment. And for the rest…
    31 October 2018
  • Roddy
    Re: How Will My Second Job Be Taxed?
    Good afternoon. I have just retired from my career. My annual pension is 26k. I am working part time earning about 4k a year…
    29 October 2018
  • Sbuj
    Re: How Will My Second Job Be Taxed?
    Hi I have full time job plus extra part time if I will start working for agency tax for one of my extra jobs will b change…
    16 October 2018