As an owner manager of a company, taking income from it in the most tax and NI efficient way is probably top of your list but are dividends the best option and when might benefits in kind trump them?
Benefits in kind are one of the three main methods of director shareholders to extract income from their company. Except in one situation, benefits are more tax/NI efficient than salary, but generally, though not always, less tax efficient that dividends.
Benefits have an advantage over dividends because a company can provide them to a director even if it is loss making. This makes them a useful alternative or addition to salary in the early years of a company’s trading when it may not have enough profits from which it can pay sufficient dividends to meet the director shareholder’s needs.
When are benefits more tax efficient?
Benefits are more tax efficient than dividends where they are exempt from tax and NI in the hands of the director shareholder. Not only is there no tax for the recipient to pay but the company receives a tax deduction for them.
Tax and NI exempt benefits include:
- Accommodation, supplies and services on your business premises
- Free or subsidised meals / Meal vouchers
- Expenses of providing a pension
- Medical treatment to help employees return to work
- Health screening and medical check-ups
- Cost of nurseries and play schemes
- Childcare vouchers
- Certain living accommodation
- Payments towards additional household costs where employees work at home
- Incidental overnight expenses
- Disabled people’s cost of travel between home and work
- Certain retraining costs
- Employer-funded or employer-reimbursed training
- Long-service awards
- Suggestion schemes
- Encouragement awards
- Financial benefit awards
- Goodwill entertainment
- Car, motorcycle and bicycle parking
- Certain gifts
- Work-to-home travel is provided when an employee works late or when sharing arrangements are disrupted
- Work buses and subsidies to public buses
- Christmas or other annual party
- Sports facilities
- Welfare counselling
- Mobile phones
- Bicycles and cycling safety equipment
Although this seems like an opportunity to be more tax efficient extracting income, there are many limits and exceptions within each of the options, so it pays to check HMRC’s rules on tax-free BIKs before offering the benefit to employees.
When are benefits less tax efficient?
Generally, benefits which are taxable and liable to NI are less tax efficient than a dividend of the same value. However, where special rules apply for working out the taxable benefit resulting in a low taxable amount e.g., zero or low emissions company cars, a benefit in kind might still edge a dividend for tax efficiency.
- Company cars for personal use
- Fuel for a company car for the employee’s personal use
- Accommodation provided rent-free or below market rent that is not essential for the employee’s job role
- Clothing allowance that is not essential for the employee’s job role
- Private medical insurance
- School fees for employees’ children
- Interest-free or cheap loans to employees over £10,000
- Holidays or holiday vouchers
Again, the rules are complex and include various exemptions that may reduce the tax liability, so check HMRC’s rulescarefully.
For more information and guidance please contact Argyle Accounting where we will be happy to help.