Joe Brough looks at benefits-in-kind commonly provided to directors of owner-managed companies, considers whether these are still beneficial, and outlines traps to avoid.
There is scope for directors of owner-managed companies to maximise their remuneration package in a tax-efficient way by utilising benefits-in-kind (i.e., goods or services provided by the company either for free or at a reduced cost). Generally, the cost of providing a benefit is a tax-deductible expense for the company as a cost of employment, whilst the benefit can be either taxable or exempt for the director.
For taxable benefits, a cost-benefit analysis should be performed before the benefit is provided. For benefits such as the provision of a company car, there can be a tax mismatch between the corporation tax deduction and the taxable benefit for the director. Where possible, the company should provide exempt benefits to ensure maximum tax-efficiency.
Taxable benefits-in-kind, whilst subject to income tax on the director, are also chargeable to Class 1A National Insurance contributions (NICs) on the company. For benefits provided during the 2023/24 tax year, Class 1A NICs are payable at a rate of 13.8%, which is also a tax-deductible expense for the company.
Taxable benefits must be reported to HMRC on form P11D(b) by 6 July following the end of the tax year. Any Class 1A NICs must be paid by 22 July. Unless the benefits have been reported through the company payroll, the company will also be required to provide each director with a form P11D.
If filed late, HMRC will impose an automatic late filing penalty of £100 for each 50 employees for each month or part month that the P11D(b) is late.
Taxable and exempt benefits
A summary of common benefits-in-kind provided to owner-directors is provided below, along with a summary of the main points regarding the provision of exempt benefits. Please note that this list is not exhaustive. A comprehensive breakdown of taxable and exempt benefits can be found in HMRC’s Booklet 480.
|
Taxable |
Exempt |
|
Company cars/fuel |
Mobile phones |
|
Medical insurance |
Company pension contributions |
|
Low or interest-free loans over £10,000 |
Trivial benefits |
|
Living accommodation |
Workplace parking |
|
Company vans/fuel |
Low or interest-free loans under £10,000 |
Mobile phone
The provision of a company mobile phone is an exempt benefit, even if there is an element of private use. One phone can be provided per director.
The exemption does not extend to mobile phones provided to other family members, unless they are also employees of the company.
Pension contributions and advice
This exemption covers pension contributions made by the company to registered pension schemes. Assuming that a director’s full annual pension allowance is available, a company can contribute up to £60,000 per year into a defined contribution pension scheme without the director incurring any personal tax charges.
If the director has other pension inputs, care must be taken that the company’s pension contributions do not result in the annual allowance being exceeded. Where the annual allowance is exceeded an income tax charge will arise on the director.
The company can also pay up to £500 for advice on the director's financial and tax issues relating to their pension provision. To qualify for the exemption, the company must arrange and pay for the advice or reimburse the director’s costs. In addition, the provision of the benefit must be available to other employees generally or at a specific location. If the costs exceed £500, the excess is subject to tax and NICs.
Trivial benefits
Companies can provide directors with trivial benefits with a value of up to £50 each including VAT. The trivial benefit must not be cash or a cash voucher, a reward for service or part of their employment contract.
The overall limit of trivial benefits a director or members of their household can receive each year is capped at £300.
Workplace parking
This exemption covers parking for either a car, motorcycle or bicycle at a workplace car park or a season ticket at a public car park at or near the director's place of work.
Interest-free loans up to £10,000
Companies can provide a director with an interest-free loan of up to £10,000 without incurring a benefit-in-kind charge. To qualify for the exemption, the total value of all loans must not exceed £10,000 at any time during the tax year.
To prevent a corporation tax charge on the company under the ‘loans to participators’ rules (CTA 2010, s 455), any loans must be repaid within nine months of the chargeable accounting period in which it was made.
Example: Utilising exempt benefits
Andy and Sarah both run their own companies. Any after-tax profits are taken as a dividend. Andy arranges for his company to contract for and pay for qualifying exempt benefits, whilst Sarah pays for the same services privately. The effects of doing so on their take home pay is as follows:
Andy Sarah
£ £
Profits before salary and BIK 50,000 50,000
Less:
Salary 12,570 12,570
Class 1 secondary NICs 479 479
Mobile phone 500 -
Season ticket for parking 1,000 -
Pension advice 500 -
Pension contribution 5,000 -
Trivial benefits 300 -
Taxable income 29,651 36,951
Corporation tax (19%) 5,634 7,021
Dividends 24,017 29,930
Dividend allowance (1,000) (1,000)
Taxable dividends 23,017 28,930
Basic-rate dividend tax (8.75%) 2,014 2,531
Private costs - 6,300*
After-tax income 34,573 33,669
Difference 904
*Pension contribution made net of basic-rate income tax
Benefits provided to non-employees
In some circumstances, a benefit-in-kind may be provided to a person other than the director. In such cases, rules exist to ensure that the benefit is still taxed on someone. Who it is taxed on depends on the circumstances under which the benefit is provided.
Where a benefit is provided to a member of the director’s family or household by reason of the director’s employment, the benefit remains taxable on the director as earnings and is subject to the normal rules of assessment.
Where a benefit is provided to a participator (shareholder) in a close company (broadly defined as a company with five or fewer participators) and the benefit cannot be attached to an existing director or employee, the benefit-in-kind rules work differently.
Where this situation arises, the benefit is calculated as normal; however, the cash equivalent value of the benefit is treated as a distribution to the shareholder. This means that the value of the benefit is taxed according to the rates applicable to dividends. However, unlike a benefit-in-kind provided to a director or employee, a corporation tax deduction is not available for the cost to the company.
Traps for the unwary
The contract for the benefits-in-kind must be made between the company and the provider. If the contract or invoice is made out in the director’s name and paid for by the company, the company will be treated as discharging a pecuniary liability. The payment will therefore be classed as earnings and subject to tax and employee’s and employer’s NICs and should be reported through the payroll.
Where the contract is in the company name, to prevent a benefit-in-kind arising, it is sometimes assumed that if the expense is debited to the director's loan account, the benefit will have been ‘made good’, and so no taxable benefit or reporting obligations will arise.
For example, there have been several cases concerning the provision of leasing company cars testing this point. In Smallman & Sons v HMRC [2021] UKFTT 300, it was held that debiting the costs of lease cars to the director's loan account, even if they were the full value paid for by the company, did not prevent a benefit-in-kind charge from arising.
This judgement followed HMRC’s loss in HMRC v Apollo Fuels Limited and others [2014] UKUT 0095. This loss resulted in a change to the legislation (at ITEPA 2003, s 114) to bring into the benefit-in-kind charge cars and vans supplied at fair value to directors and employees.
Practical tip
To make sure directors of owner-managed companies are being as tax-efficient as possible, tax advisers should regularly review clients' expenses, as they may be paying expenses personally, which would otherwise qualify as exempt benefits.
