What is the Best Way to Pay a Bonus? #AskAMS

Our profit is much better than last year. My Co Director and I were thinking of paying a bonus. What is the best way to do this?

Generally, for small Companies, dividends are still more tax efficient than salary because they avoid 13.8% Employer’s National Insurance plus 12% Employee’s National Insurance. So usually it’s better to vote, and pay dividends – but it depends on your income and tax situation.

But occasionally, paying a salary bonus is worthwhile. It reduces your Corporation Tax so long as you pay it within 9 months of the company’s year-end. It may be more beneficial than paying dividends e.g. if there are some shareholders who aren’t directors (they would be entitled to a dividend but not a bonus); or if you want to pay a large personal contribution into a pension scheme and need higher earnings (salary not dividends) to justify the pension payment.