Your company is doing especially well and you want to take advantage of its good fortune. The priority income you take should be tax efficient. Why might benefits in kind be your best option?
Extra income
When it comes to tax and NI contributions not all income is equal. What’s more, tax efficiency of different types of income can vary depending on your overall financial position. For example, for company owner managers taking a salary up to the employers’ NI threshold (£9,100 for 2024/25) is usually tax efficient overall for themselves and their company, while amounts in excess of this are typically least tax efficient. There are, of course, other options.
Income alternatives
For most company owner managers, apart from salary, benefits in kind and dividends are the income alternatives. One possible sticking point is HMRC’s optional remuneration arrangement (OpRA) rules which can reduce the tax efficiency where any contractual salary is substituted for benefits in kind.
Tip. If you control your remuneration from your company you probably aren’t affected by the OpRA rules. This means benefits can be used as an alternative tax-efficient income.
Tax on benefits
Benefits fall into two broad categories: those which are liable to tax and NI, and those which are exempt. While taxable perks are more tax efficient than salary of an equal value, generally they are less efficient than dividends. However, tax and NI-exempt benefits are even more tax efficient than dividends.
Trap. One drawback of benefits compared with dividends or salary is that they aren’t in cash. Therefore, they work best when you don’t need extra cash income or they’re used to replace an expense you would otherwise have to meet from your cash resources, e.g. your bank account.
Example. John is a higher rate taxpayer whose company contracts with a supplier to provide him with a phone he previously paid for himself. This saves him £1,200 per year. Because this benefit is exempt there’s no tax or NI for John to pay. Plus, his company can claim corporation tax (CT) relief at up to 25% on the cost of providing the phone, reducing its cost by £300 (£1,200 x 25%). By comparison, if John’s company paid him a dividend of £1,200 John’s tax bill on this would be £405 and, unlike the cost of the phone, his company wouldn’t receive any CT relief.
The best benefits
While there’s a wide range of exempt benefits, only some are suitable as an alternative to dividends. For example, mobile phones, pension contributions, pensions advice, bikes under the cycle-to-work scheme, benefits costing up to £50 and a few others. Low tax and NI benefits, such as electric vehicles, should also be considered. A full list of tax and NI-free benefits are listed on HMRC’s website.
Tip. Another advantage of benefits over dividends is that they can be provided even if your company is not making profits. This makes them especially worth considering in start-up companies where profits are tight or there are losses.
Even though dividends are generally the most tax-efficient income, for company owner managers benefits which are tax and NI exempt or low tax are better. For example, a company-paid-for mobile phone contract worth £1,200 per year can save income tax of £405 and corporation tax of £300.
The next step
HMRC’s list of tax and NI-free benefits in kind
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.