Quarterly News

Bowled over by benefits

The knowledge that you are getting the most out of your hard earned profits may provide as much of a boost as the prospect of sunshine and warm summer breezes. Whilst a key consideration might be maximising the cash at your disposal for the minimum tax cost - are you optimising your benefits?

Dividend extraction has reigned supreme in recent years for small companies as a means of providing cash to director shareholders and may also now be the most cost efficient for other companies under current tax rules and rates. Its advantage over remuneration generally 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 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 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 post tax wages.

Clearly if the overall aim is to minimise tax and NI 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 from 6 April 2006)
• 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
• permanent health insurance

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.

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