There are broadly three ways to extract income from your company but none of them is singularly the most tax efficient. What factors should you be considering when deciding which one to use?
Topping up your income
Choosing tax and NI-efficient types of income to draw from your company can make a big difference to its worth to you. As a rule of thumb, salary in excess of the NI threshold is the least efficient option. Dividends are generally the most tax efficient, but not in all circumstances. If you intend to take more income from your company you should consider each of the alternatives.
Salary or benefits
As salary is usually the least tax and NI-efficient option, this leaves benefits in kind as the other alternative to dividends. However, since April 2017 the rules block tax and NI savings, mainly the latter that previously could be made by swapping salary for perks (typically tax and NI-exempt ones) through salary sacrifice arrangements.
Tip. The good news is that if you can decide the level of your remuneration from your company you probably aren’t affected, or can easily avoid, the tax restrictions on salary sacrifice arrangements. This means benefits can be used as an alternative tax-efficient income.
Taxable or tax-free perks
Perks 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. The downside of perks, compared with dividends, is that they aren’t in cash. Therefore, they work best when used to replace an expense you would otherwise have to meet from your cash resources, e.g. your bank account.
Example. Let’s assume you’re a higher rate taxpayer and your company provides you with a mobile phone, which saves you £900 per year. Because the perk is exempt there’s no tax or NI for you to pay. Plus, your company can claim corporation tax relief at 19% on the cost of providing the phone, reducing its cost to £709 (£900 – £171, i.e. (£900 x 19%)). If you received a dividend of £900 your tax bill would be £292 and, unlike the cost of the phone, your company wouldn’t receive tax relief for it.
While there’s a wide range of exempt benefits, only some are suitable as an alternative to dividends, e.g. mobile phones, pension contributions, pensions advice, childcare schemes (if started before 6 April 2018), bikes under the cycle-to-work scheme, benefits costing up to £50 and a few others. A full list of tax and NI-free benefits are listed on HMRC’s website ( https://tinyurl.com/y39dojr9 ).
Tip. Another advantage of benefits over dividends is that they can be provided even if your company has no profits. This makes them especially worth considering in start-up companies where profits are tight or there are losses.
By: FL Memo