Your firm’s current financial year ends soon. You’re considering paying a bonus to the directors to reduce the company’s corporation tax bill. Is it possible to delay the corresponding PAYE tax and NI liabilities?
Bonus v dividends
Dividends represent the most tax-efficient method for taking income from your business. But there are circumstances where they can’t be paid or it’s not desirable to do so. For example, if your company is loss making or has external investors (shareholders) where the intention is to direct profits based on performance of the owner managers rather than all shareholders.
Timing a bonus
If you intend to pay a bonus you need to make sure the admin is dealt with properly to ensure your company obtains a corporation tax (CT) deduction for it at the earliest opportunity. The best time is shortly before the end of your company’s accounting year/period. This is because to obtain a tax deduction for the accounts to which the bonus relates there must be an obligation to pay it.
Tip. 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.
Trap. To qualify for a CT deduction for the accounting period to which a bonus relates, the actual bonus payment, e.g. the transfer of cash from the company to the director or a credit to their loan account, must be made within nine months of the end of the accounting period. If it isn’t the deduction is delayed and allowed for the accounting period in which the payment occurs.
Tip. 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 dividend that triggers the PAYE and NI liability.
Trap. Directors’ bonuses cannot be deferred simply by adding restrictions on the right to draw the sums. As stated earlier, 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.
Tip. Because a bonus doesn’t have to be paid until nine 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.
Example. Acom Ltd’s current financial year ends on 31 March 2025. Its directors hold a board meeting on 30 March at which they approve a bonus for themselves equal to 20% of the company’s profits as shown when the accounts are finalised. Acom’s accounts should include a provisional expense to reflect the expected bonus. CT relief is permitted for this as long as the bonus is paid on or before 31 December 2025. The trigger date for PAYE purposes in this case is the date the amount of the bonus is determined. Acom’s 2025 accounts are finalised in July 2025. The directors are liable to tax on the bonus in 2025/26 and not 2024/25 when the bonus was approved in principle.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.