Tax-efficient income from a personal company

Topping up income

Choosing tax and NI-efficient types of income to draw from a company can make a big difference to its worth to the participators. 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 owner managers intend to take more income from their company they 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.

The good news is that if the participators can decide the level of remuneration from company they 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.

The downside of perks, compared with dividends, is that they aren’t in cash. Therefore, they work best when used to replace an expense the participator would otherwise have to meet from their cash resources, e.g. a bank account.

Example. Let’s assume John is higher rate taxpayer and his company provides him with a mobile phone, which saves him £900 per year. Because the perk is exempt there’s no tax or NI for John to pay. Plus, his 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 H

Choosing perks

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.

Another advantage of benefits over dividends is that they can be provided even if the company has no profits. This makes them especially worth considering in start-up companies where profits are tight or there are losses.