For some time, it has generally been the case that dividends have offered company owners and directors a cost effective and flexible remuneration option compared to a bonus or salary.

However, the gap between the two has narrowed in the past few years, and with the recent Corporation Tax rise from 19% flat rate to an upper rate of 25%, it can no longer be assumed that a simple dividend option is the most effective route to take.

With a new personal tax year recently starting, now is an ideal time for directors and shareholders to assess their remuneration plans.

Why is there no clear cut answer?

Simply, every individual’s personal and business circumstances are different. Add into this the following tax changes coming into play in this new tax year, there are a number of influencing factors:

Corporation Tax

  • Increased from flat 19% rate on all taxable profits to 19% on taxable profits up to £50,000 and 25% for taxable profits over £250,000

Marginal Corporation Tax Rate

  • Effective rate of 26.5% on taxable profits falling between £50,000 and £250,000

Income Tax  

  • Tax-free Dividend Allowance cut by 50% to £1,000
  • Additional (45%/47%) Rate threshold cut from £150,000 to £125,140
  • Personal Allowances frozen

Scottish Residents

  • Remains more complex as Income Tax rates are up to 2% higher within each band and there are five instead of three rate bandings

The most effective remuneration plan will also be affected by ancillary matters such as age (no employees National Insurance for those over 65), pension contributions, salary sacrifice arrangements and benefits in kind.

If you haven’t reviewed your remuneration recently, we urge you to do so now to make sure you have the right plan for your circumstances, particularly in view of the significant increase in complexity of the tax system and the effective increase in tax rates.