|
|
Taxable income |
% |
Overall1 % |
|
Basic rate |
£0 - £32,000 |
7.5 |
26 |
|
Higher rate |
£32,001-£150,000 |
32.5 |
46 |
|
Additional rate |
150,000 + |
38.1 |
50.48 |
|
1Allowing for corporation tax at 20% for 2016/17 and
ignoring £5,000 Dividend Allowance |
|||
To alternatively provide a benefit-in-kind costing £100 in total would give rise to a Class 1A NIC liability of £100 x 13.8/113.8 = £12.13, so the benefit to the employee is £87.87, on which he would pay income tax at 20%, 40% or 45% i.e. £17.57, £35.15 or £39.54. The overall tax/NIC rates are therefore 29.7%, 47.28% and 51.67%, and compared with dividends the differences are modest in percentage terms. Dividends are payable on all shares of the class and so are less targeted in terms of rewarding particular employees, and the narrow advantage of dividends could be wiped out if Mr Osborne raises the dividend tax rates further.
Pensions
Employer payments into a registered pension scheme are deductible for corporation tax purposes and are free of income tax and NIC. The introduction of the lifetime allowance of £1.25 million (£1 million from 6 April 2016) and the annual allowance of only £40,000 have, it must be said, somewhat reduced the appeal of pensions. In addition, annuity rates are very low, and seem likely to remain so. However, the changes made in the Taxation of Pensions Act 2014 with effect from 6 April 2015, under which there is no longer any requirement to buy an annuity, have breathed new life into the use of pensions in tax/estate planning as far as members of direct contribution or money purchase schemes are concerned.
Firstly, from age 55 the ‘flexi-access drawdown’ and ‘uncrystallised funds pension lump sum’ rules mean that variable amounts of income can be drawn each year; the first 25% will be tax–free, and the balance taxable at the member’s marginal tax rate. The rate could be optimised for a year by diverting income or limiting withdrawals from the company. Secondly, if not all the fund has been drawn in the member’s lifetime the remaining fund may be left to the next generation free of inheritance tax and free of income tax in some cases, with options available to the beneficiary as to how the cash is extracted from the pension. Particularly where a member has other income the fund may therefore be used as part of estate planning.
School fees
If a company meets a ‘pecuniary’ expense of an employee (i.e. an expense incurred by the employee and payable in money), the payment is simply taxable as earnings and as such is liable to income tax and Class 1 NIC. However, if the company incurs the expense then it becomes a benefit-in-kind, the cost of which must be entered on the company’s P11D form, and Class 1A NIC is payable. This of course defers the liability which would be payable under PAYE if the payment was earnings, and of course saves the employee’s NIC. The idea therefore is for the company to contract with the school to pay the fees, but as always the devil is in the detail and the secret is getting the paperwork right, as was shown in Ableway Ltd v IRC [2002] SSCD 1 (Sp C 294). The company had agreed with the school to pay the fees directly, but the parents had signed the school entry forms and were liable for one term’s fees if they failed to give a whole term’s notice of withdrawal of the child. The Commissioner decided that the company was meeting a liability of the directors, and that Class 1 NIC was due.
How about an extension?
If a director-shareholder wanted to make major improvements to their house such as an extension, as long as the contract for the work is between the company and the builder, the cost is a benefit–in-kind at the time the benefit is ‘provided’, which, following Templeton v Jacobs [1996] STC 991, is when the benefit is available for use.
Similar principles apply to the provision of benefits in the form of white goods, home cinema systems, holidays etc., as long as the contract for the supply of the goods or services is between the company and the supplier.
Company cars
I mention company cars in the context of profit extraction only because they are a substantial item. There is no ‘rule of thumb’ which can be applied as to whether it is more cost effective, taking tax/NIC on benefits-in-kind into account, for the company to provide the car/fuel or for the director to provide personally, claim mileage allowance and adjust their remuneration/dividends to cover their extra costs. There are so many factors that specialist software is needed for the calculations.
However, for 2015/16, in relation to zero emission (i.e. electric) and ultra-low emission (not exceeding 75g/km) cars, the benefit-in-kind rate varies between 5% and 9% and the choice of such vehicles is constantly increasing. A supplement of 3% applies for diesel engines, but ceases after 5 April 2016. If the benefit-in-kind can be minimised this may well be preferable to financing personally out of taxed income. Similarly, a company van used privately attracts a benefit-in-kind of only £3,150 for 2015/16, and there are several models of SUV-type double cab 4x4 picks available, which qualify as vans.
Transfers of depreciating assets
Cars, vans, white-goods etc., all of course depreciate in value quite rapidly, and in the case of cars/vans are dependent to some extent on mileage. Again, in the case of cars some makes/models retain their value better than others, but may depreciate by as much as 40% after one year.
If the director purchases a car or asset from the company after one or two years, this may be a cost-effective way of financing a major purchase other than out of taxed income.
Loans
A loan to a director shareholder is an alternative to drawing dividends or remuneration, and can be useful in evening out income levels between one tax year and the next. However, there is of course a tariff (in the form of CTA 2010, s 455), which requires payment of notional corporation tax equivalent to 25% of the loan, unless this is repaid within nine months of the end of the accounting period during which the loan was made. If the loan is not repaid during that timescale the s 455 tax becomes payable, and is not repayable until nine months after the accounting period in which the loan was repaid.
There is also a benefit-in-kind in respect of notional interest at the ‘official rate’ of at 3% from 6 April 2015 (unless the debt is below £10,000). If the loan is released or written off the amount of the loan is taxable currently grossed up by the ‘dividend ordinary rate’ of 10%. The dividend tax changes are not in the summer Finance Bill 2015, but ITA 2007, s 19 includes a loan write-off within ‘dividend income’ and so the new rates will apply - presumably without the grossing up.
Practical Tips :
For second–hand assets sold to director shareholders at their depreciated value, it is advisable to get one or two independent valuations to support the price paid. This should be relatively easy for motor vehicles, but less practical for some other assets.
If a director’s loan is repaid shortly before the end of nine months after the accounting period and withdrawn again soon after the ‘bed and breakfasting’ rules (introduced in FA 2013) may deny relief from s 455.
It is quite common for directors to order the top of the range car of their choice through the company, only to find out too late that the benefits-in-kind are prohibitive. It goes without saying that the benefit calculations should be made beforehand (there are many websites for this) and the options considered.
