Payments to directors of your company (which may include yourself) are a common business expense, but the tax and National Insurance (NI) implications can be complex. It’s crucial to understand the various types of payments and their respective tax treatments to ensure compliance and avoid potential penalties.
The implications differ according to the types of payments
Director’s Salary:
A salary is subject to Income Tax and Class 1 National Insurance Contributions (NICs). The company is liable for Employer’s NICs on the salary. Pension Contributions: Can be made through salary sacrifice or employer contributions, which may offer tax relief.
Dividends:
If you pay dividends instead, they are taxed at a flat rate, typically lower than Income Tax rates, but not subject to NI contributions. Remember, though, that dividends can only be paid from the company’s accumulated profits.
Benefits in Kind:
It depends on what those payments are –
- Company Cars: Taxable based on the car’s CO2 emissions and list price.
- Fuel: Taxable on the benefit of free or cheap fuel.
- Accommodation: Taxable on the benefit of rent-free or discounted accommodation.
- Loans: Taxable on the interest foregone.
Expenses Reimbursed:
If expenses are incurred wholly and exclusively for business purposes, they are generally tax-deductible for the company and not taxable for the director. Non-reimbursable expenses: These can be subject to Income Tax and NI if they are treated as benefits in kind.
So, if you want to be tax efficient, your first decision is whether to pay your directors in salary or dividends. A salary offers pension contributions and certain tax reliefs, while dividends offer a lower tax rate, but no NI or pension contributions. Efficiency regarding expenses requires detailed records of business expenses, and those expenses must be directly related to business activities.
Benefits in kind get complex pretty quickly, so maybe consider alternative arrangements to reduce BIK liability. If the benefit is a company car, then ppt for lower-emission vehicles to reduce tax implications (as well as helping the environment). Accommodation and loans benefits can bring their own tax implications.
So, when deciding how to reimburse your directors and advisors, chat with us too. We can help you analyse your company’s position and the circumstances of your directors, keep you tax compliant and efficient, and make sure you’re ready for any tax audit.
So get in touch and let’s plot the way forward.