Tax Questions: Tax Efficient Director Bonuses

If your company’s accounting period ends soon and the directors want to pay a bonus so that your company can reduce its corporation tax bill, is it possible to defer paying tax on it until the following year?

Dividends are the most tax-efficient way of taking income from your business. But sometimes circumstances are such that they can’t be paid or it’s not desirable to do so. Say for example, if your company is loss making, or has external investors (shareholders) where the intention is to direct profits based on actual performance of owner managers rather than all shareholders.

Bonuses

If you intend to pay a bonus, you need to make sure that the admin is dealt with aptly to ensure your company obtains a corporation tax (CT) deduction for it at the nearest opportunity. The best time is shortly before your company accounting year-end. To obtain a tax deduction for the accounts to which the bonus relates there must be an ‘obligation to pay’.

An obligation to pay a bonus exists at the accounts year/period-end date if you vote for it in principle before the accounting year-end. The timing and method of payment can be sorted out later.

Qualifying for a CT deduction for the accounting period to which a bonus relates requires actual payment, e.g. transfer of cash from the company to director or credit to loan account, which must be made within 9 months of accounting period year-end. Otherwise, deduction is delayed and allowed for the accounting period where payment does occur. Also,

• A bonus is treated as paid (for income tax purposes) on the date the director has an enforceable right to it – even if the actual payment date is later. It’s the date that the right accrues to the bonus that triggers the PAYE and NI liability.

• Directors’ bonuses cannot be deferred by adding restrictions on the right to draw sums. A bonus is treated as paid when it is credited in the company’s accounts and records, e.g. to the director’s loan account, and not when physically paid out of the company’s bank account.

• Because a bonus doesn’t have to be paid until 9 months after the year-end, wait until after the company’s draft accounts are drawn up and the pre-bonus profit figure is known to decide on the final level of bonuses.

An illustration of this:

A business’ current financial year ends 31 March 2022 and directors hold a board meeting on 30 March to approve a bonus for themselves – 20% of company profits as shown when accounts are finalised. The accounts should include a provisional expense to reflect the expected bonus. The CT relief is permitted as long as the bonus is paid on or before 31 Dec 2022. The trigger date for PAYE purposes in this case is the date the amount of the bonus was determined. The 2022 accounts are finalised July 2022. Directors are liable to tax on the bonus in 2022/23 (not 2021/22 when it was approved in principle).

NI Impact

If you’re including a bonus in your company’s accounts which won’t be paid until on or after 6 April 2022, don’t forget to reflect the employers’ NI at the higher rate (15.05%) which will apply from that date. It is possible to vote a corporation tax deductible bonus but not trigger the PAYE until later. A decision by your company to pay a bonus doesn’t count as payment for PAYE purposes. The trigger date is when the amount of the bonus is determined or, if earlier, when the bonus is available for the directors to draw.

Let’s Talk

For help calculating your company’s bonuses and other year-end tax considerations, talk to our team of tax specialists. Contact us on Let’s Talk and a member of our team will be in touch soon.