Dividends Or Bonuses?

For several years until 2005, some companies used an arrangement for paying bonuses which involved employees receiving a particular type of share in a UK tax resident company (often specially created for this purpose). Those shares then paid out a dividend shortly after employees received them. Following payment of the dividend, the shares then effectively ceased to have any value at all: i.e. they were just created to pay the dividend.

The supposed tax efficiency of this scheme sprung from the intricacies of the tax system. It was believed that particular provisions in the tax code meant that employees were not taxable on receiving this particular form of share; dividends could not be recharacterised as bonuses and so would suffer tax at a more favourable rate than employment income; and finally that dividends would also escape National Insurance contributions (NICs).