Increasing tax rates on dividends and frozen tax thresholds, alongside inflation, are decreasing the take-home value that owner managers are getting from their businesses.
Following on from our article on tax efficient remuneration for owner/managers, this article is a round up of the small, and some quite large, ways you can extract funds from your business in a tax efficient way. They can add up to a significant saving.
Trivial Benefits – Businesses can give their employees and directors small gifts free of tax or NI, for example supermarket gift vouchers. Each gift can be up to £50 per person (including any VAT if appropriate). Trivial benefits for directors are limited to £300 per tax year; e.g 6 x £50 Tesco vouchers. We had to use Tesco as an example since we’ve used their slogan for the article! There are a few important conditions to be met, so please consult your usual RG contact for details.
Relevant Life Assurance – Purchasing a standard life assurance policy through a family company will give rise to a benefit in kind tax charge. Purchasing key man insurance won’t lead to a tax charge, but any pay-out will go to the company, where it will be subject to the usual tax charges on extraction. A relevant life policy is the best of both worlds – the named beneficiary can receive the pay-out, there is no benefit in kind charge and the company gets a corporation tax deduction for the premiums.
Electric cars – purchase of a diesel, petrol or hybrid car through a company almost always gives rise to a very hefty benefit in kind (BIK) tax charge. Zero emissions vehicles are currently subject to a BIK percentage of only 2%, meaning that the taxable benefit from a car with list price of £35,000 is £700; illustrative tax cost £280 for a 40% taxpayer. This compares with a 37% BIK charge at the other end of the spectrum for a diesel car – using the same example, the tax charge on a diesel car of the same value would be £5,180.
So if an electric car could suit your needs, buying or leasing it through your company means that the cost, plus insurance, servicing, tyres etc come out of pre-tax profits, reducing corporation tax whilst providing you with the vehicle to use in return for a very small income tax charge. The company can pay to instal charging equipment and can usually pay for charging too.
Mobile phones – companies are allowed to provide all employees, including directors, with a mobile phone without giving rise to a taxable benefit. With the latest iPhone costing up to £1,750, plus the ability to reclaim the VAT, this is a worthwhile saving compared to buying your phone personally out of post-tax income. There are some traps for the unwary; for example the invoice and any contract must be in the company name, not the name of the director.
Laptops – similarly, companies can provide a laptop to each employee / director without giving rise to a tax benefit.
Bikes – the government is keen to encourage us all to travel healthily and sustainably and the Cycle to Work scheme can be used to benefit owner managers as well as employees. There are a few options, as well as some important criteria to be met.
Medical check-ups, eye tests and glasses – under Health and Safety regulations, companies are obliged to pay for employees, including directors, to have an eye test each year. This is a tax-free benefit, and, if glasses are required specifically for VDU use, then the glasses can also be paid for by the company without a benefit in kind arising. Glasses for general use, but including a special prescription for VDU use, can benefit from a partial exemption. An annual health check can also be paid for by the company without a tax charge.
Adult children – last, but certainly not least, most business owners are aware of the tax efficiencies resulting from paying dividends and small salaries to supporting spouses, so that more of the family’s income is taxed at the lowest tax rates. This logic extends to children too. Giving shares to minor children is much more complicated, but where children have turned 18, and especially if they’re still in education, gifting them shares in a family company can mean that they receive dividends to use their personal allowance each year. Effectively they can be supported through university by the company, rather than out of the post-tax income of their parents. Dividends are paid after corporation tax, so this option is not tax free. But it does save over £4,700 in tax compared to paying the same £12,000 dividend to an additional rate parent.
A quick tally up….
These suggestions may be individually small, but they certainly add up. In one year, implementing all of these could save a family business with husband and wife directors, and 2 further adult children as shareholders, over £15,000.
Photo by Murillo de Paula on Unsplash