Your daughter has just left school and wants to take a vocational course. It will cost around £4,000. If you got your company to pay for it, will it be more tax efficient than meeting the cost from your pocket?
Company cash
HMRC doesn’t like company owner managers dipping into their companies’ bank accounts at will to pay for personal bills. As far as tax and company law are concerned there’s nothing wrong with it. HMRC’s objection is that it’s open to abuse by unscrupulous individuals and it’s often difficult for it to spot. As a law abiding company owner manager that’s not your problem. However, you must ensure that transactions are properly recorded and any tax and NI consequences dealt with correctly. Tip. To avoid trouble with HMRC you should notify whoever does your company’s bookkeeping if a bill is personal.
PAYE tax and NI trouble
When your company pays a personal bill it counts as earnings and therefore is taxable in the same way as salary. That means PAYE tax and Class 1 NI is payable. The trouble is because your company can’t take this from the money it pays to the person or business who issued the bill, it has to account to HMRC for the tax and NI as if the amount was net salary paid to you.
Example. Ted takes a salary from his company, Acom Ltd, equal to his personal tax-free allowance. His other income from Acom is taken as dividends because they are more tax efficient. He passes a bill for £4,000 for his daughter’s art course to Acom to pay. It must treat this as if it were net salary. The tax and Class 1 NI (employees’ and employers’) it must pay is a whopping £2,336 (see The next step ). Tip. A more tax-efficient option is open to Ted and Acom. Assuming Acom has sufficient profits, it can pay Ted a dividend of £4,384 which he uses to pay the £4,000 personal bill and, when he completes his self-assessment tax return, the £384 income tax payable on the dividend. This is a far more tax-efficient option than just getting Acom to pay the bill.
Note. The tax and NI differential between getting the company to pay the bill or paying a dividend to Ted so he can settle it is proportionately less if he is a higher rate taxpayer, but still heavily in favour of the dividend. The respective tax and NI costs would be £3,611 (deemed salary) and £2,038 (dividend).
Take a loan instead
Tax and NI would be avoided entirely if Acom paid the bill but treated it as a loan to Ted. This is certainly worth considering. However, ultimately the loan would have to be repaid, or written off, and assuming Acom is Ted’s only or main source of income, he would need extra salary or a dividend to clear the loan. Either, of course, triggers similar tax and NI liabilities as we’ve already explained. Paying the personal bill with a loan from Acom merely defers them. The good news is that there’s another option which can be tax and NI free.
Tip. Acom could lend Ted’s daughter the money to pay the bill. She can repay the loan by doing odd jobs for the company in her own time. Where pay for the work (£4,000) is less than her personal tax-free allowance and NI threshold (£1,048 per month), there’s no tax or NI for Acom or Ted’s daughter to account for.
Simply getting your company to pay a personal bill can be very tax and NI inefficient. A better option is for it to pay you a dividend which you use to pay what’s owed. A zero tax and NI alternative is for your company to lend the money to your daughter to pay the bill. She repays the loan by doing casual work for the firm.