The increase in the top rate of income tax to 50% from 6 April 2010 for individuals with a total income of £150,000 or more is likely to prompt many companies to bring forward the payment of bonuses and dividends to employees and shareholders, so that they fall within the current tax year 2009/2010.

Where this decision is being considered it is essential that the impact of the pension anti-forestalling legislation is not overlooked for anyone whose pension contributions might exceed £20,000.

It is important that companies are aware of the existing legal and practical requirements when considering whether to trigger an entitlement to a bonus or dividend before 6 April 2010, even if it cannot be paid until the following year.

Payments to employees

A money payment to an employee is taxable on the earlier of:-

• The time when a payment is made of (or on account of) earnings, or
• A time when someone becomes entitled to such a payment.

This is extended for company directors to include the earliest of:-

• The time when sums on account of earnings are credited in the company’s accounts or records, or
• If the amount of earnings for a period is determined by the end of that period, the date on which the period ends, or
• If it is not determined until the period has ended, the time when it is determined.

The cost of triggering an entitlement to a bonus before it is actually paid is that PAYE and NIC become payable in the normal way a month after the entitlement accrued, so cashflow issues must be considered. 

Dividend payments

The company must ensure that the following points are not overlooked:-

• Unlawful dividends – the company must have sufficient distributable profits to enable the payment of a full dividend (even if some shareholders waive their entitlement).
• The company must have sufficient cash to pay the dividend – the use of waivers or amounts left on loan account may attract the interest of HMRC.

At Menzies we have significant experience in providing assistance to companies on the above matters, and if you would like any further information, please contact Richard Godmon, Partner, on 02392 448400 or by emailing rgodmon@menzies.co.uk.