If you are an owner director, the choice between bonus and salary has changed.

As the calendar year ends – and with it many companies’ financial years – the tax changes of the past twelve months are moving into the spotlight. Since December 2022 directors have seen:

• The dividend allowance cut in half (and a similar cut to the capital gains tax annual exempt amount);
• The additional rate (top rate in Scotland) tax threshold fall from £150,000 to £125,140;
• Corporation tax rates increases for companies with profits exceeding £50,000 a year;
• Employer and director national insurance contribution rates reduced;
• Increases to the pensions annual allowance and the phased abolition of the pensions lifetime allowance.

The most tax-efficient way to draw profits from a company with a 31 December year end may differ in 2023 from 2022.

Pension contributions?

This year an employer pension contribution may be a more attractive option than in 2022, thanks to the phased abolition of the lifetime allowance rules. If those rules have prevented you and/or your company from making pension contributions in recent years, now could be the ideal time to catch up.

While they have to be justified, employer pension contributions can be significant, and would benefit from full corporation tax relief at the new, higher rates. In practice, the complexities of pensions alongside all those other tax changes mean advice is vital before taking any action.