One way or another: tax costs of taking bonuses and dividends

For many years the vast majority of owner managers have been taking dividends to extract surplus profits from ‘their’ companies while also drawing a reasonable monthly salary. Many have also made further tax savings by passing some (ordinary) shares to their spouses and paying them appropriate dividends.

But we have recently had some very significant changes to tax and National Insurance contributions (NICs). Probably the most important is the April 2023 rise in corporation tax rates to 25% for most companies. Dividend tax rates were raised by 1.25% across the board in 2022. And the higher rate band was restricted with a ceiling of £125 140 in 2023. All these changes have a material effect on the tax costs of extracting cash from an owner managed company.

So while dividends may have normally been favoured over bonuses a few years ago this might no...