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Choice of Dividend or Bonus

Newsletter issue - June 07.

When you run your own company you have a good deal of flexibility over how and when to extract profits from your business. You may take a basic salary and top up your income with a dividend or bonus once or twice a year. Which of these alternatives is more tax efficient depends on your highest tax rate, and the tax rate paid by your company. But these tax rates are changing, so the policy that saved tax previously may not work in the future.

If you pay tax at the basic rate of 22% and your company pays corporation tax at 20%, the tax saved by you and the company combined is significant where those funds are extracted as a dividend. This is because the dividend is free of national insurance and income tax in your hands.

Where the bonus or dividend you receive pushes your personal income into the higher rate tax band (taxed at 40%) there is still a combined tax saving by paying a dividend, if the company pays tax at 20%. However this tax saving will reduce as the corporate tax rate rises to 22% in 1% stages in 2008 and 2009.

If your company pays the higher or marginal rates of corporation tax, (currently 30% to 32.5%) and you are already paying 40% on part of your income, there is no tax saved overall by paying a dividend rather than a bonus.

Although a dividend is a tax efficient way to extract profits in most cases, there are alternatives. For example if the company uses a property, which is held in your own name, it can pay you a market rent which is free of national insurance. Ask us to look at how you could extract more profits from your company in tax efficient ways.

 

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Choice Events Limited

All at Beauchamp Charles are very helpful, approachable and easy to talk to. They keep me informed with key dates; I can feel totally confident that I won't ever miss any deadlines! Whoever I deal with, always deal with matters professionally and efficiently and if they are unavailable they get back to me promptly.

FT leisure Ltd

I have worked with Beauchamp Charles as our management accountants for over 20 years and have never received anything less than exceptional service. Their approach is both professional and personal. Finances and particularly tax strategies are a minefield for small businesses; Beauchamp Charles have in-depth knowledge of these area, which is comforting. They pay very close attention to our business activities and have provided financial strategies that have helped our company develop.

Fredrick Thomas Electrical and Maintenance

We have used Beauchamp Charles since company formation back in 1998. Beauchamp Charles offers us a one to one service as they are small enough to offer this dedicated service and large enough to do the work and offer best advice. They get to know us as individuals and a business, always giving sound advice. Frederick Thomas Electrical are in a stronger place thanks to the service we get from them.

Barnes Walker Landscapes Limited

We are a small business and had employed the same accountancy firm for many years. Two years ago we took the decision to switch to Beauchamp Charles after several othe local businesses recommended them very highly to us. We have not been disappointed with the service they have provided to us over these last two years.