Benefits from your profits

The potential ‘feel good’ factor that arises from the prospect of better summer weather could be likened to the satisfaction of getting the most out of your hard earned profits. Whilst a key consideration might be maximising the cash at your disposal for the minimum tax cost - are you optimising the potential of tax free benefits or even making use of value for money taxable benefits?

From a cash perspective dividend extraction as a means of providing cash to director shareholders continues to be generally tax efficient for all sizes of company under current tax rules and corporation tax rates. Its advantage over remuneration is that there is no national insurance cost. This fact currently outweighs the other key matter that dividends do not attract corporation tax relief. But what about the type of remuneration which benefits from obtaining tax relief for the business and has no national insurance cost?

The need to extract cash is always going to be an essential component of extracting profits for living requirements but the provision of tax free benefits by a company to directors and employees has certain merit, worthy of fresh consideration. Like dividends, tax free benefits are not subject to national insurance for either the employee or the employer. Yet the company should obtain a tax deduction where provided as part of a commercial remuneration package. It also has flexibility as different types of benefit can be provided for different individuals. Furthermore, unincorporated businesses can also participate in respect of their employees. This could be a valuable motivational incentive at a reduced cost.

Even where benefits are not income tax free and so attract employer national insurance there are still favourable reasons for considering their provision. Firstly, there is still no employee national insurance. Secondly, the cost to the employer of providing certain benefits to employees is cheaper than each individual employee buying the benefit out of ‘net of tax’ wages.

Clearly if the overall aim is to minimise tax and national insurance cost overall then the benefit provided needs to be tax free and some examples of such benefits include:

• a mobile phone for personal and business use (restricted to one per employee)
• free car parking at/near place of work
• contributions to registered pension schemes
• health checks and eye tests
• business mileage paid at HMRC’s approved rates
• nursery provision up to £55 a week per parent (depending on whether basic, higher or additional rate tax payer)
• permanent health insurance
• interest free loans provided the total does not exceed £5,000 (to be increased to £10,000 from 6 April 2014).

To obtain tax and national insurance favourable treatment on benefits, it is essential that their provision is structured correctly. If this is an area of interest to you please contact us for further information.