As an alternative to salary or dividends, benefits in kind are a potentially tax-efficient option for directors, especially those of multiple companies. But what’s the advantage and when can you use it? Brona MacDougall takes a closer look.
Most tax experts will tell you that dividends are the most tax-efficient form of income for director shareholders, and generally we agree. But dividends do have their limitations, for example, they can only be paid if your company makes profits. In that case paying a salary or benefits in kind are the usual alternatives. Even so, there’s room for tax planning, especially, but not only, if you have multiple directorships.
Most accountants will suggest that you take a modest salary from your company, which for tax and NI efficiency should be no more than the annual earnings threshold – £8,632 for 2019/20. That means no NI contributions are payable by you or your company. The trouble is that if you’re a director of more than one company, HMRC may treat them as being related for NI purposes.
Salary paid by companies which are related must be lumped together for NI purposes and only one earnings threshold allowed against the total.
For example, if you’re a director of three NI-related companies and each pays you £8,000 salary, while separately the payments are below the threshold, together they exceed it by £15,368 ((£8,000 x 3) – £8,632). The resulting NI bills for the company and you add up to £3,965 (£15,368 x 13.8% + £15,368 x 12%).
With some exceptions, if your company arranges and pays for a benefit in kind you won’t have to pay any NI contributions on it, although your company will.
Employers must pay 13.8% Class 1A contributions on benefits, which is the same rate as Class 1, payable on salary, but the advantage is that as a director you have no NI to pay which makes for a healthy saving.
Example: Susan is a director of three related companies. For 2019/20 they pay her a salary of £8,632 so no employers’ or employees’ Class 1 NI is payable. They also arrange and pay for her gym membership, home broadband, TV and a range of other benefits. The total cost is £10,000. Class 1A NI of £1,380 is payable on this. Had the £10,000 been paid as salary Susan would have had to pay £1,200 NI, but as a benefit in kind she pays none.
Salary and benefits planning
The same strategy that’s used for maximising tax and NI efficiency when using salary and dividends should be used for salary and benefits. That is, you should take a salary at least equal to the NI threshold before turning to benefits because Class 1A NI is payable on benefits even where they fall below the threshold.
Example: Susan takes all her income from her three directorships, say £18,632, as benefits in kind. Class 1A NI at 13.8% must be paid by the companies on these, i.e. £2,571 (£18,632 x 13.8%). If, instead, the companies between them pay Susan a salary of £8,632, plus benefits of £10,000, Class 1A of £1,380 only is payable on the benefits but nothing on the salary.
Exempt benefits are particularly efficient for small businesses as they constitute a tax deductible expense of the business but do not attract employers Class 1A NI. They are also not taxable or assessable for NIC for the employee or director. The types of benefits that a director could receive tax free would be the provision of a mobile phone, including line rental and calls (provided that the employee did not ultimately own the phone), life assurance contributions, pension contributions, parking and annual health screening.
Employees, including directors, aren’t liable to NI contributions on most types of benefits in kind. Therefore, where dividends can’t be taken for any reason, benefits in kind make a tax-efficient alternative. They are especially effective where companies are related and have to share a single NI threshold.