When should you take perks instead of dividends?
As a rule of thumb, dividends are the most tax and NI-efficient method of taking income from your company. But there are sometimes better alternatives. What are they and when can you use them?
Remuneration Planning
For employees the most tax-efficient form of remuneration is that which gives them the most in their pocket. But as director shareholders there’s more to consider. You also need to take account of the financial impact on your company. It’s little use taking income that’s tax efficient for you if that leaves your company worse off as it reduces the value of your shareholding.
Dividends
In almost every circumstance, extracting profit from a company is achieved most tax efficiently by a director shareholder drawing a salary roughly equal to the NI earnings threshold and taking further income as dividends. That’s the generally accepted view, but director shareholders might gain an advantage from receiving benefits in kind (BiKs) in preference to dividends.
Benefits
BiKs broadly fall into two categories: those liable to income tax and NI and those which are exempt from both. BiKs which are taxable are more tax efficient than salary of an equal value, but still come second by some margin when compared to dividends.
Tax and NI-free benefits
One drawback to tax and NI-free BiKs is that, unlike dividends, they don’t end up as cash in your bank account or pocket. By nature they are an alternative to cash. Therefore, to get BiKs to work for you they really need to replace a cost that you would incur personally out of your taxed income, but which your company now meets directly. Plus, as mentioned above, they need to be exempt from income tax and NI. The list of suitable BiKs isn’t terribly long, but some of the front runners are:
- contributions to a registered pension scheme
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training paid for by your company
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childcare facilities
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childcare vouchers (limited exemption)
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free/subsidised meals in the workplace.
You can find more tax and NI-free BiKs listed on HMRC’s website.
Financial Advantage
The financial advantage of taking a tax and NI-free BiK instead of a dividend isn’t that huge, but is still worthwhile. For example, say your company provides meals on workdays instead of you paying for them. This saves you £1,500 per year and costs your company the same. You would be better off by £488, plus your company would save tax of £285 because it gets a corporation tax deduction for the cost of the BiK, whereas no deduction is allowed for a dividend.
Additional Benefits
A further advantage to BiKs over dividends is that they can be provided by your company even where it has no profits. Conversely, dividends can only be paid where your company has profits. This can make tax and NI-free BiKs a good option for a young business as it’s often a few years before it starts making money.
We Can Help
Our accountants can assist you with Corporate Tax Planning and Personal Tax Planning. Contact us on 01753 892 815 or email info@hmiller.co.uk to find out more.