4 tax-saving schemes directors need to know
Updated: Jan 22
Four legitimate schemes that won’t land you in hot water with HMRC, but which let you extract £20,800 from your company tax-free.
1. TRIVIAL BENEFITS
You don’t pay tax on a benefit for an employee if all of the following apply:
It costs £50 or less to provide (over £50, the whole lot is taxed, not just the bit over £50)
It isn’t cash or a cash voucher
It isn’t a reward for work or performance
It isn’t in the terms of their contract (i.e. there’s no expectation of getting it).
If you’re a director of a closed company you can treat yourself too! (A closed company has 5 or fewer shareholders). Every little helps, so we recommend directors do this.....
Claim non-monetary items of up to £50 during the year
Make sure these 'trivial benefits' meet the conditions above
Don’t spend more than £300 per director in a tax year - there is a cap for directors
Record these as a an expense in the accounts
Use a company card because personal expenses don't count unless the receipt is in the company name.
HMRC don't need you to tell them about these trivial benefits so long as the conditions are met. Better still, they don’t count towards taxable income so you/your employee(s) don’t pay any tax on them, and your company can claim corporation tax relief on the cost.
Many directors pay themselves £8,788 - this is the maximum payment possible without paying Income Tax or National Insurance Contributions. An added benefit is that whilst no National Insurance payment is made, you will get a National Insurance 'credit' which means that the year counts as a qualifying year for the state pension.
3. DIRECTOR'S LOAN INTEREST
If your company owes you money, you can charge interest (at a rate in line with commercial unsecured loans). For any year that the company can’t pay the interest, you can accrue it but it’s only tax deductible for your company when it’s actually paid.
There are 3 allowances that can be used to extract this money from the company tax-free:
Personal Allowance: If you have not used up the full £12,500 tax-free Personal Tax Allowance, the company can pay you interest on your loan without you incurring income tax - so long as the payment plus all other income is under the Personal Allowance.
Starting Rate for Savings: If you have non-savings income under £17,500, then you can earn up to £5,000 tax-free per year in savings income (e.g. interest payments). For every £1 of income over the Personal Allowance of £12,500, the £5,000 allowance reduces by £1.
Personal Savings Allowance: If you are a basic or higher rate tax paper you can use the Personal Savings Allowance to receive tax-free interest payments - up to £1,000 for basic rate or £500 for higher-rate tax-payers.
There are some downsides:
Form CT61 needs to be completed to inform HMRC - so there is an admin overhead;
Your company has to deduct basic rate tax from the gross interest payment and pay that to HMRC by the deadline. However, you can claim this back via the self-assessment return, or via R40;
Where funds provided by a director aren’t used for the purposes of the company’s trade, the interest paid on the loan is not tax deductible for the company;
To generate sufficient interest, you need to have a considerable director’s loan so it’s not a scheme that all companies can make use of.
Tax on interest over the allowance is paid at the usual rate of Income Tax, so remember to factor in interest from other sources, e.g. bank or building society, peer-peer lending.
Dividends are payments to shareholders from the profits of a company after Corporation Tax. It is a tax-efficient way for a director to extract money from a company, but it can only be paid if there is enough profit after Corporation tax to cover the dividend payment (which needs to be made to all shareholders).
The company doesn’t pay tax on the Dividend payment itself, but the shareholders have to declare it on their Self Assessment returns. Any Dividends above the £2,000 tax-free Dividend Allowance will be tax as follows:
7% Basic Rate tax-payers (income up to £37,500)
32.5% Higher Rate tax-payers (income from £37,501 - £150,000)
38.1% Additional Rate tax-payers (income over £150,000)
How to provide tax-free renumeration of £20,800 by making use of legitimate allowances:
If you don't have a director's loan that is big enough to generate such a large interest payment, then it is certainly worth considering a larger salary payment to use as much of your £12,500 Personal Allowance as possible:
1. A salary of £9,500 results in an Employer's NIC of £98. However, it also saves the company an extra £135 in Corporation Tax compared to a salary of £8,788.
2. If your company has more than one person on the payroll, it may be eligible for the Employment Allowance. This can be used to reduce the Employer's National Insurance Contributions by up to £4,000. So a salary of £12,500 will generate an Employee NIC of £360, but saves the company an additional £705 in Corporation Tax compared to a salary of £8,788.
A final word: Limited companies can make pension contributions for directors. The pension rules are complex and advice should always be sought, but in very broad terms, the contribution (when it is paid by the company) is corporation tax deductible and, assuming the contribution falls within the person’s available pension allowance, it will not be taxed on the individual until such time as they draw it out of the pension.
Even then the individual, under current rules, has the opportunity to draw out 25% of their pension fund completely free of tax (in most cases).
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