Peter Rayney examines owner-managers’ cash extraction for 2025/26.
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On a sunny Newcastle morning, Vera was reviewing her company’s January 2025 management accounts. Vera was the sole director and 100% shareholder of Land Rovers 2U Ltd. The business was on course for a healthy pre-tax profit of around £550,000 for the year ended 31 March 2025. She had been planning to pay herself a substantial ‘bonus’ before the year end.
However, following the recent tax and National Insurance contributions (NICs) changes, she was now a little perplexed and did not know whether it was best to pay herself a dividend or a bonus.
A trusted adviser!
As always in times like these, she decided to ring her trusted accountant, Kenny:
“Hi Kenny, as I told you last week, we are having a really good year, and I want to take a sizeable payment out of the company – it’s the first time in years since I have been able to do so. We always took ‘my money’ out as a dividend. But with all the recent tax and NICs changes, I really don’t know whether it’s still the right thing to do. I find it all very confusing. What would you recommend?”
Kenny replied:
“Yes – things are definitely not the same any more, Vera – and as a general rule, dividends are not as beneficial as they used to be. On the other hand, the increase in the employers’ NICs to 15% from April must also to be factored into this. The decision to pay a dividend over a bonus really depends on your individual circumstances. The best thing here, Vera, is for me to run some numbers on a spreadsheet for you and see what this tells us.”
“That’s a great idea”, answered Vera. “Try to make it simple for me. As you know, the company now has quite a bit of cash in the bank – about £400,000 – which we have built up over the last few years. I think I could safely take out, say £100,000, which would still leave a respectable buffer and support our trading cash flows. How much would the tax be on that? If you could let me know whether I should take it as a dividend or a bonus. By the way, just to let you know, I will have already taken my monthly salary of £12,000 up to the end of March.”
‘Bonus vs dividend’ calculations
Kenny promised to let Vera have some figures so she could make an informed decision. He prepared a spreadsheet that showed the relevant tax and NICs costs of paying £100,000 either as a bonus or a dividend. The spreadsheet tax calculations assumed that Vera would take her normal £120,000 salary for 2025/26 and would have around £30,000 of investment income.
Kenny emailed the spreadsheet over to Vera the next morning, which contained the following workings:
|
Estimated position for year ended 31 March 2026 |
Bonus |
Dividend |
||||
|
|
£ |
£ |
||||
|
Amount earmarked for bonus/dividend |
100,000 |
100,000 |
||||
|
Less: Employer’s Class 1 NICs (see note 1) |
(13,043) |
- |
||||
|
Less: Corporation tax at 25% (see note 2) |
- |
(25,000) |
||||
|
Gross bonus/cash dividend |
86,957 |
75,000 |
||||
|
PAYE/NICs on bonus of £86,957 |
|
|
||||
|
PAYE - £86,957 x 45% (see note 3) |
(39,131) |
|
||||
|
Employees’ NICs – £86,957 x 2% (see note 4) |
(1,739) |
|
||||
|
Dividend tax |
|
|
|
|
|
|
|
Additional top tax rate of £100,000 x 39.35% (see note 5) |
|
(29,512) |
||||
|
Net cash available for Vera |
46,087 |
45,488 |
||||
|
Notes |
|
Follow-up
After receiving Kenny’s email and spreadsheet, Vera arranged a Zoom call with Kenny. “Thank you for your spreadsheet, Kenny. Based on your figures, it looks like it is marginally better to pay me a bonus – is that right?”
Kenny reacted: “Yes, as you can see from my spreadsheet (he had mastered the Zoom share screen facility!), you can see that taking the bonus gives a small cash saving. However, your bonus would be subject to an immediate deduction for PAYE and NICs. On the other hand, since you have not taken any bonuses or dividends these past few years, you probably would not have to pay this dividend tax until 31 January 2027. And what is more, you should be able to get a decent interest return on these funds until then. So perhaps dividend is the way to go – it’s all quite marginal really. A little while ago, I probably would have advised taking out some of this money as a pension contribution – the annual allowance is £60,000 but equally important, the lifetime allowance has effectively been scrapped. But I would hesitate now because of the proposal to make our pension pots subject to inheritance tax. This is going to reduce the attraction of pension ‘saving’, although I do have some thoughts on mitigating this. But that is a conversation for another day. I do not think you will be retiring any time soon, Vera!”
Kenny also added: “We could also generate some savings by passing some of your shares to your husband, and then re-designating them as a separate class of shares. This will enable you to place some £50,000 or so dividend at a much lower tax rate. The shares given to your husband will have to enjoy full rights to vote, dividends, and capital. Have a think about it?”
Vera thanked Kenny for all his help. He had made her see everything more clearly and she mused how fortunate she was to have such a ‘savvy’ accountant and tax adviser!
Practical tip
In the past, dividends have generally been preferred by owner-managers. However, this is no longer the case. In many cases, the overall tax differential will be quite close. Since the decision is based on the specific numbers involved, calculations should be made to determine the optimum method of extracting ‘surplus’ profits.
