As an owner manager of a company, taking income from it in the most tax and NI-efficient way is probably a top priority. The general view is that dividends are the best option, but when might benefits in kind be better? Kenny Logan from our Edinburgh office takes a closer look.
Benefits in kind are one of the three main methods for director shareholders to extract income from their company. Benefits are usually more tax/NI efficient than salary, but generally, though not always, less tax efficient than 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 a director shareholder’s needs.
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.
Based on the company paying tax at the small profits rate of 19% and the whole dividend is taxed at the dividend basic rate, both the director shareholder and the company are better off with a benefit in kind rather than a dividend. The tax savings would be even greater where the company pays CT at the main or marginal rate, or the director is a higher or additional rate taxpayer.
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.
Tax-exempt benefits in kind are more tax efficient for both you and your company compared with a dividend of equal value. This can also be true for zero or low emissions cars. This is because, unlike dividends, your company gets a tax deduction for the cost of providing the benefit and there’s no income tax or NI for you to pay.
For company related matters our experienced team are happy to assist, contact JRW.