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For companies paying small company rates of Corporation Tax, dividends remain more tax efficient as a means of extracting profits from the company.

The common arrangement over recent years has been the payment of a minimal salary equivalent either to the personal allowance or the personal allowance plus the 10% tax rate band, with additional remuneration taken as dividend.

This remains the case today, although the question arises as to whether there is a level of salary that would lessen the likelihood of HMRC questioning the remuneration arrangements.


Payment of a salary equivalent to the personal allowance does not give rise to any National Insurance charge, but retains the right to benefits including a qualifying year for State Pension purposes. One issue which many consider to be a factor preventing this strategy is where the director wishes to pay pension contributions over and above the personal allowance figure. However, payment of premiums is not restricted to 100% of relevant earnings if they are paid by the company and the total remuneration package to the director is not in excess of a commercial value for his/her duties. HMRC manual BIM46035 confirms this as follows:-


“You should accept that the contributions are paid wholly & exclusively for the purposes of the trade where the remuneration package paid in respect of a director of a close company, or an employee who is a close relative or friend of the director or proprietor (where the business is unincorporated) is comparable with that paid to unconnected employees performing duties of similar value. When there are no employees with whom duties are genuinely comparable, you should follow the general guidance at BIM47105.  


Premiums in excess of salary will be allowable, therefore, if the total package is commercially justifiable.


The dividend strategy is dependent upon the company having sufficient current year and retained profits to pay a legal dividend. Where this is not the case, the payment of an illegal dividend would be treated as taxable remuneration by HMRC.

One way round this problem is for the director to draw from the company on his director’s loan account, putting the DLA overdrawn. This would have consequences for the company in terms of having to pay 25% tax on account to HMRC under s.419, but not if the loan is cleared within nine months of the company year end.

If the loan is written off within that nine month period, it avoids the s.419 charge and the write off for a director of a close company is treated as a distribution, taxed in the same way as a dividend would be.

The problem with this is that HMRC guidance indicates that the write off of a loan is chargeable to class 1 (both employers and employees).

Detailed calculations are needed to see whether a loan write off or a bonus to clear the DLA is more beneficial.

For a company with profits over £300,000 and paying Corporation Tax at marginal rates, the payment of a bonus will be more tax efficient than further dividends.



Childcare costs.


Remains a useful planning point for husband and wife companies, although rules have been modified for schemes starting after April 2011.

For taxpayers receiving childcare vouchers or employer funded childcare prior to April 2011 then the company can continue to pay up to £55 per week per employee, either in vouchers or direct to the provider.

There is no tax or NI payable, and the company can deduct the cost against Corporation Tax.

The vouchers must be offered to all employees, but often does not appeal to employees claiming tax credits as they can lose more in working tax credit entitlement.

Care must be provided by a registered or approved child carer who is not a relative.

The vouchers must be used for qualifying care provided before 1st September following the child’s 15th birthday.

For schemes starting after 1st April 2011, the rules are the same but the maximum weekly amount varies according to the marginal rate of tax the employee is paying. For a basic rate taxpayer the limit is £55 per week, higher rate payer £28 per week and for an employee in the additional 50% tax band £22 per week.

Consider whether extra curricular activities e.g. guitar lessons, dance classes, are provided persons registered as child carers, as they may qualify for the scheme.


Get the company to pay for personal items.


There can be an advantage to the company paying for personal expenditure with the director paying tax on the benefit, rather than meeting the expense personally out of taxed income.

Perhaps appropriate if there are insufficient profits to draw additional dividends.

Again, each case on its merits.




Francis Royale

Certax Accounting

020 8697 5970

Certified Accountant

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