Where shareholders are able to control dividend payments from their own companies, consideration should be given to replacing bonuses with dividends and also to the timing of such dividends.
Dividends are generally a more tax-efficient way of extracting cash when compared to additional salary. This is because the overall tax payable (by the company and the individual) is generally lower than when income is subject to tax and national insurance contributions (NICs).
In some cases, the directors’ individual shareholdings do not make it commercially viable to replace bonuses with dividends. It is possible to introduce multiple classes of shares, or for shareholders to waive their dividend entitlements, but this can be caught by anti-avoidance rules. Another option could be to pay all dividends into a joint directors’ loan account (DLA). Each shareholder is then taxed on their share of the dividend income (the tax can be paid from the DLA), but the amounts withdrawn might be unrelated to the shareholding proportions.
Dividends can also be advantageous from a cash flow viewpoint: tax and NICs on a bonus are payable immediately, whereas tax on a dividend can be payable up to 21 months later. This can be extended up to 40 months through the making of loans to shareholders which are then cleared by a dividend paid at a later date.
The rate at which dividends will be taxed is due to increase from 6 April 2016 and therefore dividends which are planned should be reviewed now, before the new dividend tax rate is introduced.
RSM can help ensure you are extracting cash using the most appropriate methods and can advise on changes to improve the pay you receive.