Choosing tax and national insurance efficient types of income to draw from your company can make a big difference to its worth to you.
- Salary – As a rule of thumb, salary within of the national insurance threshold (£8,164 for 2017/18) is the most efficient option
- Dividends – This option became less efficient in 2016/17 when the dividend tax allowance of £5,000 was introduced, in replace of the dividends credit
- Perk – Perks fall into two categories: those which are liable to tax and national insurance, and those which are exempt. As perks are not in cash it is therefore, best used to reduce an expense you would otherwise have to meet from your personal funds.
So what’s the best option from maximum efficiency?
The table below looks at a few examples
|Salary||Dividends||Perks||Total Income||Tax & N.I Due|
|1||£8,164 *||5,000||Mobile phone £40 plan – £480||£13,644||£0.00|
|2||£11,500 **||£5,000||Childcare – £55pw – £2,860||£19,360||£850.64|
|3||£8,164||£10,000||Pension contribution – £5,000 plus Childcare – £55pw – £2,860
* This scenario is based on you being a basic rate tax payer
**This scenario is based on you as an employer not being entitled to the employers allowance.
What are the best perks?
There is a wide range of perks to choose from but only some perks are suitable as an alternative to dividends such as:
- Mobile Phones – one mobile phone provided by your company and any line rental and calls.
Note:- if you reimburse yourself for your phone bill, this is taxable, where as if your company provides a phone and pays it directly this is not taxable.
- Pension Contributions – paying into a pension scheme either monthly or as a lump sum as the employers contribution
- Bikes & cyclists safety equipment under the cycle to work scheme – The bike is on loan from the company and during the loan period the ownership of the equipment is not transferred to you. The bike is mainly (more than 50% of the bikes use) used for qualifying journeys
- Childcare scheme – There is a limited exemption if you provide childcare vouchers, if you joined the scheme before the 5th of April 2011,the amount depends on whether you are a basic rate payer (£55p/wk), a higher rate payer (£28p/wk) or additional rate payer (£25p/wk) check to see if it is worth it first if you receive working tax credit.
Another advantage of perks over dividends is that they can be provided even if your company has no profits.
For a full list of tax and national insurance free benefits are on HMRC’s website