How to delay your tax bill by careful timing

Whilst dividends are usually the most tax effective way for doctors or dentists trading as directors of their own limited companies to extract money for personal use, it isn’t the only way. Salary and bonuses still have a place to play under certain circumstances and can in fact be a tool for tax planning where cash flow needs a helping hand.

Time your bonus for early corporation tax relief

The best way to demonstrate this is using an example. The directors, Jack and Jill, of A2B Healthcare Limited prepare the company year-end accounts to 31 March 2014. Their company profits are high this year so they issue a bonus of £50,000 to the directors. The tax relief is claimed in the company accounts as at 31 March 2014 resulting in a reduction in the overall corporation tax. The £50,000 bonus can however is considered as just a company bonus provision until it is actually allocated and paid to the directors, which must be within nine months of the year-end. Therefore, in this example, the bonus needs to be paid by December 2014.

The benefit to your corporation tax bill

Corporation tax is reduced a year earlier by making a bonus provision.  If the bonus had been accounted for based on the payment date the tax relief would apply to the company year ended 31 March 2015.

The benefit of your personal tax

By allocating and paying the bonus, say in December 2014, any PAYE tax is delayed by nine months.

Sole director? Take care…

If you are the sole director of your company, extra care needs to be taken if using this method to time tax efficiently. Directors are taxed differently to employees so the tax rules need to be scrutinised and applied to your specific circumstances by an accountant or tax advisor before proceeding, especially as bonuses trigger PAYE and this falls under the new RTI regulations, which can be complex and mistakes, costly. In the above example, there was a deliberate “directors”.  The £50,000 bonus was acceptable for corporation tax relief because the “bonus fund” had not been actually allocated to a specific director, Jack or Jill – a task that would be taken care of before December 2014. PAYE applies only when the bonus is actually allocated, something that is harder to leave “undecided” if you are a sole director.

Dividends v bonus

Typically, for a family business paying remuneration as dividends still works out the best method for tax efficiency even though dividends are not deductible for corporation tax. This is due to the lower rate of personal tax that directors pay withdrawing money as dividends rather than salary or a bonus that results in both PAYE and NIC. Are you a doctor or dentist who requires more information on time efficient tax planning or whether a bonus would be a better solution for you than dividends? Contact the Figurit Healthcare team on 020 7376 9333. More on how much you can withdraw tax free from your company in dividends, read our February 2014 article.