Many in business will trade through the medium of a limited company and the directors will generally be remunerated by the payment of dividends or salary. The former are taxed on the recipient and must be paid out of profits subject to corporation tax, while the latter are subject to National Insurance contributions (NICs) as well as income tax. So, are there more tax-efficient ways for owners to extract value from their companies?
-
Loans
The company could make a loan to the director. The company will incur a tax charge when the loan is made, which is repayable when the loan is repaid. The director does not incur an income tax or NICs liability on the amount loaned but is taxed on the benefit of an interest-free or low-interest loan, calculated by reference to HMRC’s ‘official rate’ of interest. On the other hand, if the director (or indeed anyone else) has lent money to the company for business purposes, the company can pay a commercial rate of interest. This will potentially be subject to income tax but, unlike salary, there is no NICs charge. Of course, if the company can afford to repay the loan, this can be withdrawn free from income tax and NICs. As well as money, the director may own assets (e.g., property or plant and machinery) that are loaned to the company for its use. If so, a commercial rent could be paid with a similar NICs saving.
-
Expenses
Directors will often incur expenses on behalf of the business. They should keep records and receipts and ensure that they are reimbursed for such costs rather than accepting that they are compensated by their salary. The reimbursement would not be subject to tax or NICs.
-
Family Members
Relatives may work for the business – perhaps a spouse or children; if so, they should be paid an appropriate salary. Not only will this ensure that minimum wage issues are avoided, but money may pass from the company to the family with lower liabilities than if a larger sum was paid to the controlling individual. The wages must be commercially justifiable; if not, they could be disallowed in arriving at the company’s taxable profits, leading to effective double taxation. Family members could also be given shares, enabling dividends to be paid to them. Advice is essential here, because as well as potential capital gains tax issues on the gift, there may be other implications.
-
Pension Contributions
An individual can contribute to a pension scheme and receive tax relief at their marginal rate. However, they will probably have paid NICs (as will the company) on the salary from which those premiums are paid. The company could instead pay the director’s premiums as employer’s contributions – and perhaps any other family employees.
-
Benefits
There is not enough space to examine this area in detail, but some benefits can be provided to a director and other employees that may have tax advantages. For example, the provision of a mobile phone is taxexempt, as would be computer equipment if this is provided for work purposes and personal use is insignificant. Company cars, in general, may now not be as tax advantageous as they were, but electric cars and vans have relatively lower tax charges and may be worth investigating.
Conclusion
A limited company can have many advantages as a conduit for business, but its existence as a separate legal entity can result in additional tax and NICs charges. Professional advice will be essential in ensuring that those liabilities are minimised.
Practical Tip
A review of working patterns and practices will be useful in determining whether tax-advantageous benefits or expenses payments may be provided by the company to its directors and employees. For example, with homeworking increasingly popular, an HMRC approved tax-free weekly amount can be paid in respect of the additional household costs.
