Salary, dividend or bonus for the director?

Is it more efficient to pay the salary, dividend or the bonus for director ending employment?

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Hi, I have a client that is closing the company and has about 20k in cash.  They're retiring (won't get the state pension yet), so there won't be any earned income for this tax year. They had one month of payroll filled (about 1k) for April, and they want to end the payroll but pay themselves a salary of 8k instead (up to employer NI) for May. Although it's perfectly legal, I do have a feeling that this will raise some eyebrows at HMRC, and not to forget a huge tax (which will get refunded) due to salary extrapolation.

I advised them to pay a bonus instead since it simplifies the paperwork and the end result is the same, + take everything else as dividends  (basic rate tax payer) and leave 3k for CGT on distribution.

Do you have any other opinions on how to further optimize this?

 

Replies (12)

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By Ruddles
03rd May 2024 12:38

Can you explain the difference (in tax terms) between a bonus and additional salary?

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Replying to Ruddles:
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By pierschester
03rd May 2024 12:51

Ruddles wrote:

Can you explain the difference (in tax terms) between a bonus and additional salary?

Unless I'm looking at this wrong, paying it as a salary will lead to a high NI tax bill (as estimated income for the tax year is adjusted), which shouldn't be the case for bonuses?

I'm not advising much on payroll these days so may miss a few things

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Replying to pierschester:
By Ruddles
03rd May 2024 13:18

pierschester wrote:

I'm not advising much on payroll these days s


That is probably just as well. My point was that there is no difference for tax purposes between additional salary and bonus - they're different names for the same thing. Why you should think the treatment would be different is beyond me.
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Replying to Ruddles:
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By Paul Crowley
03rd May 2024 14:27

+1
First thing I thought on reading the the first line.

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DougScott
By Dougscott
03rd May 2024 13:10

Your other name isn't Kataj is it? I suggest you ask an accountant about the most tax efficient way of closing down a company.

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By FactChecker
03rd May 2024 14:38

I did wonder ... OP asked Kataj to DM him if he (K) wanted it sorting out - and does seem to have some equally outré ideas (viz bonus not treated as earnings).

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By cayol
03rd May 2024 14:04

Your advice is wrong. If he resigns as a director then the NI thresholds would be pro-rated as for the number of weeks he was a director.

So just paying another 1k in May and then taking the rest as dividends + CGT is probably optimal. Taking more will cause breaching NI thresholds and paying more than dividend tax + corporation tax.

Check CA44 section 7 on page 3.

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Replying to cayol:
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By Geoff56
03rd May 2024 14:17

Surely pro-rating only applies in the year of appointment; not in the year of resignation.

This from CA44, page 10, para 22:

"22 Annual earnings period
A person who is a director at the beginning of the tax year (6 April) has an annual earnings period for that tax year even if they cease to be a director before the tax year ends (5 April)."

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Replying to Geoff56:
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By cayol
03rd May 2024 14:26

Geoff56 wrote:

Surely pro-rating only applies in the year of appointment; not in the year of resignation.

This from CA44, page 10, para 22:

"22 Annual earnings period
A person who is a director at the beginning of the tax year (6 April) has an annual earnings period for that tax year even if they cease to be a director before the tax year ends (5 April)."

Whaaat? Is that a new edition, because I do remember that it was pro rated both ways. I need a coffee.
Then yes I guess, the advice still holds, whatever salary or bonus shouldn't really matter, all NI is calcualted the same and goes on the payslip

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Replying to cayol:
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By Geoff56
03rd May 2024 14:31

No, it's not a recent change; it's been that way for years.

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By FactChecker
03rd May 2024 14:44

'Twas ever thus.

Although I normally prefer to reference the legislation, i-Croner puts it clearly:
"Where a person is a director of a company at the start of a contribution year (6 April), the earnings period for that person in respect of all earnings from the company during that year is a year.
This is so, even though the person ceases to be a director during the course of the year. He reverts to the normal method for employees from the start of the next tax year."

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Replying to cayol:
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By HL86
08th May 2024 07:49

"Probably".... depends on their personal circumstances. Appointing an accountant who knows their personal and company tax affairs might be a better idea

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