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ACCA Strategic Professional · Advanced Taxation (UK) · Taxation effects of the financial decisions made by businesses and individuals

Omar owns all the shares in Delta Ltd, a UK trading company. Delta Ltd has profits subject to corporation tax at the main rate of 25%. Which of the following best describes why a dividend is often more tax-efficient overall than a bonus for an owner-manager who is a higher rate taxpayer?

A bonus is subject to income tax plus both employee and employer national insurance contributions, although the company gets a deduction. A dividend carries no NIC, though it is paid from post-tax profits with no deduction. The NIC saving usually makes dividends more tax-efficient overall.

  1. ADividends are exempt from income tax up to the personal allowance only, so no saving arises
  2. BBonus is taxed at 40% income tax only with no NIC, while dividends bear NIC
  3. CA bonus suffers employee and employer NIC in addition to income tax, whereas dividends bear no NICCorrect
  4. DDividends are taxed at lower rates and are also deductible for corporation tax

Explanation

Salary or bonus bears income tax plus employee and employer NIC, although the company obtains a deduction. Dividends bear no NIC but are paid out of taxed profits with no deduction. The overall comparison usually favours dividends because of the NIC saved. Dividends are not deductible, so the last option is wrong.

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