Taking Account
  • Taking Account

Year end choices for directors

Autumn 2007

The last day of the year, 31 December is a popular date for company year ends. This year it falls on a Monday, although many companies draw a line in the accounts on the previous Friday, rather than opening on New Year's Eve. If your company has a 31 December accounting date, you need to start thinking about your year end corporate planning now. Decembers's festive activities could all too easily get in the way if you delay the deadline until nearer the deadline date.

You have three main options in terms of drawing out profits: dividends, bonus and pension contributions. In 2007, there have been subtle changes on all three fronts:

Dividends

The small companies' rate of corporation tax increased to 20% on 1 April 2007, so if that rate applies to your company, its effective tax rate for the calender year 2007 will be 19.75% (a quarter of the year at 19% and three-quarters of the year at 20%). The small companies' rate rises to 21% for 2008 and 22% for 2009.

Bonuses

HM Revenue and Customs (HMRC) has issed new guidance on the level of remuneration for controlling directors that they regard as allowable against tax. They say that "...the level of the remuneration package is a commercial decision and it is unlikely that there will be a non-business purpose for the level of the remuneration package". Dividends do not count as remuneration.

Pension Contibutions

The guidance on controlling directors' remuneration also applies to pension contributions, which do count as part of remuneration in HMRC's view. The maximum contribution that could normally be made on behalf of a director without attracting a personal tax charge (the annual allowance) has risen to £225,000 for 2007/08.

The choice between whether you draw a bonus or dividen still works in favour of dividend if your company's profits are subject to the small companies' rate.

While dividends win if you need the cash, pension contributions may remain the way of avoiding any immediate charge to tax or NICs. The Financial Services Authority does not regulate taxation advice.

Hilton Sharp & Clarke