By Anita Jaynes on 27 January, 2014

Our profit is better than last year so my Co Director and I want to pay a good bonus. What is the best way to do this?

For small companies, dividends are more tax efficient than salary because they avoid 13.8% Employer’s National Insurance plus (often) 12% Employee’s National Insurance.

Usually it’s better to vote, and pay dividends – but it depends on your income and tax situation.

You could get tax relief for salary bonuses in your accounts – so long as you pay the bonuses within 9 months of the company’s year-end. In some circumstances, it may be more beneficial than paying dividends e.g. if there are some shareholders who aren’t directors (they won’t get a salary bonus but would receive a dividend bonus); or if you want to pay a large sum into a pension scheme and need higher earnings (salary not dividends) to justify the pension payment.

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