How to Manage Directors Bonuses Tax Efficiently

If your company has made a profit, it is highly likely that every director will receive a share from it as bonus. In order to get an early tax deduction, these bonuses must be paid within a specified time, but on the otherhand there will be a large PAYE bill.

The director’s salary or bonus is a corporation tax deductible cost for the business. However, HMRC could dispute such deduction if the remuneration is excessive compared to the company’s income. However, in practice there hasn’t been such a case so far. Therefore, those who run owner managed businesses need not worry about this too much. But one needs to keep a close eye on the timing of such pay

The corporation tax rules allow some room when it comes to directors’ pay. A deduction can be claimed in the company’s accounts as long as the remuneration is paid no later than nine months from the end of the accounting period. This means your company can benefit from corporation tax relief but defer the tax consequences for the director.

The deferral of PAYE using this nine-month rule provides a business with a useful cash flow advantage, but HMRC is keen to challenge its use if he thinks a bonus has actually been paid earlier. This has become more important since the relatively recent introduction of penalty charges for late PAYE payments. The trouble is “payment” for tax purposes can occur sooner than you might think.

For advice on the timing of the bonus payments and the implications on corporation tax and PAYE, contact your local account. As these tax matters are complicated and can have a significant impact on your business, it is best that you seek professional advice. If you run your business in South West London and needs advice, contact KVS Accountants on 020 7731 6131 for personalised tax advice. KVS act as accountants and tax advisors in Putney, Wandsworth, Barnes, Earlsfield, Southfields, Wimbledon, Roehampton and Battersea.


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