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Bonuses and dividends may be more tax efficient than salary increase following April 2010 tax hike

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If you run your own company and are considering an increase in your salary 2010-11, HfM Accountants suggest you might like to consider the following points given the forthcoming tax hikes

Tax increases from April 2010

  1. From 6 April 2010 if your income is in excess of £100,000 you will start to lose your tax personal allowance, initially this can create a marginal tax rate up to 60%.
  2. From the same date if your income is over £150,000 you will be subject to the 50% rate of income tax.
Consequently increasing your earnings in 2010-11 may not be a tax effective move if you are a high income earner. Instead you may like to consider paying yourself a bonus in March 2010? You must have a clear and commercially sound reason for a bonus payment. If you were to follow this strategy the bonus would be taxable at the current highest rate, 40% and would have no effect on your current year personal allowance.

There is a timing downside to this arrangement; any tax and NIC due on the bonus would become payable on 19 April 2010 (22 April if you pay electronically) instead of being spread over the year if you settled on a salary increase instead.

Of course, when practical to do so, extra dividends are usually a better option than bonuses. Dividends voted in March 2010 will mean extra higher rate tax due 31 January 2011.

Hfm suggest that If you are a high income earner and would like to discuss this and other strategies for minimising the impact of the changes coming in the next tax year, you should contact an accountant for professional advice.

Posted March 8, 2010

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