In a climate of rising interest rates and rising inflation, every penny is likely to count. For working parents, help with their childcare costs is welcome. The tax-free childcare system can provide up to £2,000 a year tax-free.

Tax-free childcare

The Government’s tax-free childcare scheme allows working parents to open an online childcare account to pay for their childcare costs and receive a tax-free top-up from the Government on the amount that they deposit in the account. The top-up is worth 25% of the amount deposited to a maximum of £500 a quarter (£2,000 a year). This means that every £80 deposited by the parent pays for £100 of childcare costs until the cap is reached. A parent paying £667 a month into the account will receive the maximum top up.

If the child is disabled, the maximum top-up is doubled to £1,000 a quarter (£4,000 a year).

The money in the childcare account can only be used to pay for approved childcare, such as that provided by a childminder, nursery nanny or by an after-school club or play scheme. The childcare provider must be signed up to the scheme.

Eligibility

To be eligible for the tax-free top-up, a parent must be working, on sick or annual leave or maternity, paternity or adoption leave. A parent may also be eligible if their partner is working and they are on certain benefits and are re-starting work within the next 31 days.

The parent must also pass an income test. Over the next three months, the parent and their partner if they have one must earn at least:

• £1,967 where they are aged 23 or over;
• £1,909 where they are aged 21 or 22;
• £1,420 where they are aged 18 to 20; or
• £1,000 if they are under 18 or an apprentice.

This is equivalent to 16 hours a week at the relevant National Living or Minimum Wage. Dividends, interest, income from property and pension payments are not taken into account. Where a person is not paid regularly, average income over the year can be used.

The child

The childcare provided with the money from a tax-free childcare account must be for a child aged 11 or under living with the claimant. Eligibility ceases from 1 September following the child’s 11^th birthday. Where the child is disabled, they must be under the age of 17.

Exclusions

The tax-free childcare top-up cannot be claimed at the same time as universal credit, working tax credit or child tax credit. Employees who joined their employer’s childcare voucher or supported childcare scheme on or before 4 October 2018 cannot benefit from both tax relief under the scheme and tax-free childcare.

Where more than one source of help is available, it is advisable to do the sums to see which is most beneficial.

In a partnership, profits and losses are shared between the partners in accordance with the profit sharing ratio. This may be fixed, for example, three partners may agree to share profits in the ratio of 40:35:2; but it does not have to be. Instead, the partners can simply agree to share profits and losses in such proportions as is agreed between them.

A fixed profit sharing ratio has the advantage of certainty as each partner knows at the outset what their share of the profits will be. It also enables the partners to agree up front on an allocation with which they are happy, and which is transparent. However, this may not be the best option from a tax perspective. By contrast, a flexible profit sharing ratio whereby partners agree on the profit allocation each year according to their personal circumstances will allow them to minimise their combined tax bill. While this is unlikely to be acceptable where the partners only have a professional relationship with each other, where there is a personal relationship, for example, if the partners are married or in a civil partnership, a flexible profit sharing ratio can be advantageous from a tax perspective.

Example

Anne and Bill are married and in partnership. They agree to share profits and losses in such proportion as is agreed between them.

In 2021/22, Anne also has a job from which she earns £35,270. Bill’s only income is from the partnership.

The partnership makes a profit of £70,000. Taking account of their personal circumstances, they agree to share the profits in the ratio 2:5, so that Anne receives profits of £20,000 and Bill receives profits of £50,000.

Anne pays tax of £4,000 on her profits (£20,000 @ 20%).

Bill pays tax of £7,846 (20% (£50,000 – £12,570)).

Their combined tax bill is £11,846. If they had shared profits equally, the combined tax bill would have been £14,846 as £15,000 of the profits would have been taxed at 40% rather than 20%.

Anne retired from her job on 1 April 2022. In 2022/23 her only income is from the partnership. However, Bill undertakes a consultancy role from which he earns £40,000. The profits from the partnership are £60,000 for 2022/23. As their circumstances are different this year, it is better from a tax perspective to share profits in the ratio of 5:1, so that Anne receives profits of £50,000 on which she pays tax of £7,846 and Bill receives profits of £10,000 on which he pays tax of £2,000 – a combined tax bill of £9,846.

Had they continued to share profits in the ratio 2:5, Anne would have received profits of £17,143 on which she would have paid tax of £914.60 and Bill would have received profits of £42,857 on which he would have paid tax of £14,168.80, and their combined tax bill would have been £15,083.40. By adopting a flexible profit sharing ratio, they can reduce their combined tax bill by over £5,000.

The Annual Investment Allowance will now remain at £1 million permanently rather than reverting to £200,000 from 1 April 2023. This change of plan may mean that businesses will want to consider their capital expenditure plans. However, companies wishing to take advantage of the time-limited super-deduction and 50% first-year allowance will need to ensure that they incur the qualifying expenditure by the 31 March 2023 deadline.

Annual Investment Allowance

The Annual Investment Allowance (AIA) allows 100% relief for qualifying expenditures up to the AIA limit. Both companies and unincorporated businesses can benefit from the allowance. Whilst most expenditure on plant and machinery qualifies, there are exclusions, the main one being cars.

The news that the AIA limit will now remain at £1 million is good news. However, businesses that were rushing to meet the 31 March deadline or delaying capital expenditure to avoid being caught under the harsh transitional rules that would have applied had the limit reverted to £200,000 from 1 April 2023 may now wish to revisit their plans.

The transitional rules that would have applied where an accounting period spanned 31 March meant that capital expenditure incurred in the period from 1 April 2023 to the end of the accounting period may not have benefitted for the AIA in full, despite being within the AIA limit for the period of a whole. There is now no need to avoid incurring capital expenditure in this period as the cap is no longer relevant. Consequently, expenditure can be delayed beyond 31 March 2023 without losing the AIA.

Also, businesses planning significant investment can now benefit from an AIA limit of £1 million a year beyond 31 March 2023. Consequently, where cash flow is tight, the pressure to meet a 31 March 2023 deadline to benefit from the AIA on qualifying expenditure up to £1 million is removed.

Companies

In addition to the AIA, companies can also benefit from alternative claims for qualifying expenditures incurred in the period from 1 April 2021 to 31 March 2023. Where the expenditure would normally qualify for main rate writing down allowances of 18%, a super-deduction of 130% of the expenditure can be claimed instead. A lower 50% first-year allowance is available where the expenditure would otherwise qualify for special rate capital allowances at 6%. This will be beneficial where the AIA limit has been used and is likely also to be used in future accounting periods, otherwise, the AIA gives relief at a higher rate.

Review expenditure and optimise claims

Business should review their capital expenditure claims and consider, where possible, how expenditure can be timed to maximise reliefs. Remember, the AIA, super-deduction and 50% first-year allowance do not need to be claimed or claimed for the full amount of the expenditure. Writing down allowances can be claimed for expenditures not relieved under these routes.

While the permanent increase in the AIA limit has removed some deadline pressure, companies wanting to take advantage of the super-deduction will need to incur the expenditure on or before 31 March 2023 to benefit from the generous 130% relief that it provides.

If you need to file a self-assessment tax return for 2021/22, you must do this online by 31 January 2023 if you want to avoid a late filing penalty. However, if you received your notice to file a tax return after 31 October 2022, a later deadline applies; you must file the return within three months of the date of the notice to file.

You must also pay any remaining tax that you owe for 2021/22 by 31 January 2023. If you are self-employed, this is also the deadline for paying Class 2 and Class 4 National Insurance for 2021/22. Where your tax and Class 4 National Insurance liability for 2021/22 is at least £1,000, you must also make your first payment on account for 2021/22 by the same date, unless at least 80% of your tax liability for the year is collected at source, for example, under PAYE.

The need to pay any remaining tax and National Insurance for 2021/22 plus the first payment on account for 2022/23 by 31 January may present something of a financial challenge, particularly given the cost of living crisis. However, if you have a source of income that is taxed under PAYE, there is a way to spread the cost without the need to agree to a Time to Pay arrangement —  by opting to pay your self-assessment bill through PAYE. However, there are certain eligibility conditions to be met, and you must also file your 2021/22 tax return online by the earlier date of 30 December 2022.

Am I eligible?

You can pay your self-assessment tax bill for 2021/22 through PAYE if:

• you owe less £3,000 on your tax bill;
• you already pay tax through PAYE (for example, on employment or on a pension);
• you submitted your 2021/22 tax return online by 30 December 2022 or you filed a paper tax return by 31 October 2022.

However, you will not be able to choose this route if:

• your PAYE income is insufficient to collect the tax that you owe (in addition to the tax on that income);
• as a result of the adjustment, you would pay more than 50% of your PAYE income in tax;
• collecting self-assessment tax through PAYE would more than double the tax paid in this way; or
• your tax bill was more than £3,000 but was reduced below this amount as a result of payments on account.

If you owe more than £3,000, you cannot use this option – it is not possible for £3,000 to be collected under PAYE and the balance to be paid by 31 January. However, if you are struggling to pay, you could consider setting up a Time to Pay arrangement to spread the cost.

Where you elect to pay your 2021/22 self-assessment tax bill through PAYE, your 2023/24 tax code will be adjusted to collect the tax throughout the 2023/24 tax year. This effectively allows you to spread the cost over 12 months and pay in interest-free instalments. In a climate of rising interest rates, this is an attractive option (although on the downside, it will reduce your take-home pay each month).

It will not always be apparent when a hobby tips over into a trade and the point at which you need to declare your income to HMRC. There is no statutory definition of a trade beyond that a trade includes a ‘venture in the nature of a trade’. Consequently, in deciding whether a trade exists, HMRC look to the ‘badges of trade’. These are indicators of trading developed from case law.

The badges of trade

There are nine badges of trade.

1. Profit-seeking motive: an intention to make a profit support trading but is not by itself conclusive.
2. The number of transactions: systematic and repeated transactions will suggest a trade.
3. The nature of the asset: is the asset of a type than can only be turned to advantage by sale, does it yield an income or does it provide ‘pride of possession’ (for example, a picture for personal enjoyment). An asset which is acquired for sale would suggest trading, whereas an asset acquired to yield an income would suggest an investment.
4. Existence of similar trading transactions or interests: transactions that are similar to those of an existing trade may themselves be trading.
5. Changes to the asset: has the asset been repaired, modified or improved to make it more easily saleable of saleable at a greater profit?
6. The way in which the sale was carried out: was the asset sold in a way that was typical of a trading organisation, which would suggest the existence of a trade, or did it have to be sold to raise cash in an emergency?
7. The source of finance: was money borrowed to buy the asset and could the funds only be repaid by selling the asset?
8. The interval between the purchase and the sale: assets that are the subject of a trade will normally (but not always) be sold quickly. Consequently, the intention to sell an asset shortly after sale will suggest trading. However, where the intention is to hold the asset indefinitely, it is less likely to be the subject of a trade.
9. Method of acquisition: an asset that is acquired by way of inheritance or as a gift is less likely to be the subject of a trade.

It is important to note that the above is not a checklist and it is not necessary for every badge to be present for there to be a trade. Further, no particular badge is conclusive evidence of a trade. Rather, it is a case of considering each badge and whether it is present or absent to form an overall impression of whether a trade exists.

Telling HMRC

If you are earning a small amount of money from your hobby, for example, making and selling occasional birthday cakes, it is unlikely that you will need to tell HMRC. The trading allowance means that if the income from your self-employment is less than £1,000 you do not need to report it to HMRC. However, it should be noted that each person is only allowed one trading allowance across all sources of self-employment. Consequently, a person who is already self-employed and earning more than £1,000 will need to pay tax on any income from a hobby business, even if the income from the hobby is less than £1,000 a year.

If your income from your business for the tax year is more than £1,000, you will need to register for self-employment by 5 October after the end of the tax year.

To save work, employers can pay employees a mileage allowance if they use their own car for business journeys. The Government have recently cleared up confusion as to what can be paid tax-free, confirming the maximum tax-free amount.

Mileage allowance payments

The approved mileage allowance payments system is a simplified system that allows employers to pay tax-free mileage allowance payments to employees who use their cars for business travel. Under the system, payments can be made tax-free up to the ‘approved amount’.

A similar, but not identical, system applies for National Insurance purposes.

The approved amount

The approved amount for tax is calculated for the tax year as a whole and is simply the reimbursed business mileage for the tax year multiplied by the tax-free mileage rates for the type of vehicle used by the employee. Rates are set for cars and vans, motor cycles and cycles and are as shown in the table below. They have been unchanged since 2011/12.

Kind of vehicle	Rate per mile
Car or van	45 pence per mile for first 10,000 business miles 25 pence per mile for subsequent business miles
Motor cycle	24 pence per mile
Cycle	20 pence per mile

Example

Mo uses his own car for business and drives 12,350 miles in the tax year. The approved amount is £5,087.50 (10,000 miles @ 45p per mile + 2,350 miles @ 25p per mile).

Any payments made in excess of the approved amount are taxable and must be reported to HMRC on the employee’s P11D. If, on the other hand, the employer does not pay a mileage allowance or pays less than the approved amount, the employee can claim a deduction for the difference between the approved amount and the amount actually paid, if any.

Confusion

Earlier in the year, a petition went before Parliament calling for an increase in the advisory rate from 45 pence per mile to 60 pence per mile to reflect the increases in fuel prices since 2011. Parliament rejected the petition stating that the rates remained adequate as they covered all running costs and the fuel element was only a small part. However, in their response, they pointed out that employers could pay higher amounts tax-free where this represented the amount of actual expenditure and could be substantiated:

‘The AMAP rate is advisory. Organisations can choose to reimburse more than the advisory rate, without the recipient being liable for a tax charge, provided that evidence of expenditure is provided.’

The Government subsequently backtracked on this, stating in a written Parliamentary statement that:

‘The response [to the petition] stated that actual expenditure in relation to business mileage could be reimbursed free of Income Tax and National Insurance contributions. This is in fact only possible for volunteer drivers. Where an employer reimburses more than the AMAP rate, Income Tax and National Insurance are due on the difference. The AMAP rate exists to reduce the administrative burden on employers.’

Maximum tax-free amount

The maximum amount that can therefore be paid tax-free to employees using their own car for work is the approved amount, regardless of the car that they drive or the actual costs incurred. However, if the employer wishes to pay more, car sharing could be encouraged and the employer could also pay passenger payments (of 5 pence per mile) for each colleague that the driver gives a lift to (providing the journey is also a business journey for them).

For company car drivers, the maximum tax-free amount that can be paid is governed by the prevailing advisory fuel rates published by HMRC.

If you are a VAT-registered business you must charge VAT when you make taxable supplies. You must also pay over the difference between VAT you have charged and the VAT that you have suffered to HMRC (or, where a scheme such as the flat rate scheme is used, the amount due to HMRC under the scheme rules). Assuming your customers pay their bills, it is the customer who provides the funds for the output tax which must be passed on to HMRC and from which you can recover any input tax that you have incurred.

But what happens if the customer cannot or will not pay their bill?

If you are not paid for supplies of goods or services that you have made to a customer on which you have charged VAT, you may be able to claim relief from VAT on the bad debts that you have incurred. Conversely, if you do not pay bills on which you have reclaimed input VAT, you may need to repay that VAT.

Bad debts

You can claim relief for VAT on bad debts if the following conditions are met.

1. You have already accounted for the VAT on the supplies and paid it to HMRC.
2. You have written off the bad debt in your day-to-day VAT account and transferred it to a separate bad debt account.
3. The value of the supply is not more than the customary selling price.
4. The debt has not been paid, sold or factored under a valid legal assignment.
5. The debt has remained unpaid for a period of 6 months from the later of the time that the payment was due and payable and the date that the supply was made.

It should be noted that if you use the cash accounting scheme or a retail scheme that allows you to adjust your daily takings for opening and closing debtors, a claim for bad debt relief is unnecessary as VAT is only paid on amounts that you have actually received from your customers.

You must wait at least 6 months from the later of the date on which the payment was due and payable and the date of the supply before making a claim. The claim must be made within 4 years and 6 months from that date. You can claim the relief in your VAT return, but the claim cannot be made in a return for a VAT accounting earlier than the one in which you become entitled to the relief.

The need to wait 6 months before making the claim means that you will have to pay the VAT over to HMRC in the first instance (and meet the cost of this) before claiming it back.

You must also notify your defaulting customer that you have made a claim for bad debt relief.

Repaying input tax

If you do not pay a supplier and you have reclaimed VAT on that supply, you must repay the input tax if the debt remains unpaid 6 months from the later of the date of the supply or date on which the payment was due. If you are given time to pay (for example, payment terms are 30 days), the clock starts from the date payment is due rather than the invoice date.

To make the repayment, you should make a negative entry in your VAT return and account for the repayment in the return for the period in which the repayment became due.

To ensure that a business does not pay more income tax than it needs to, it is important that a deduction is claimed for all allowable expenses. The rules on what constitutes deductible expenditure can be confusing. They also depend on whether the accounts are prepared on the cash basis or the accruals basis. However, there are some basic rules which must be met.

Wholly and exclusively rule

The basic rule is that a deduction is allowed for expenses incurred wholly and exclusively for the purpose of the trade. The rule works by prohibiting expenses that are not wholly and exclusively incurred, stating:

‘In calculating the profits of a trade, no deduction is allowed for –

• expenses not incurred wholly and exclusively for the purposes of the trade…’

There is no requirement that the expense is necessarily incurred.

Consequently, you can deduct an expense if it is incurred wholly and exclusively for the purposes of your business and the deduction is not otherwise prohibited (as for certain entertaining expenses and depreciation).

No deduction for private expenditure

Only business expenses meeting the wholly and exclusively test can be deducted – a deduction for private expenditure is not permitted.

If you operate as a sole trader, it may be easy for the boundary between business expenses and personal expenses to become blurred. For example, you may pick up some items for your home at the same time as some cleaning products for the business and pay for them together. In this situation, it would be easy it inadvertently claim a deduction for the whole amount. If the business items can be separately identified, a deduction can be claimed for these.

To prevent errors, it is advisable to keep good records and keep business and personal expenditure private. Ideally, there should be a separate business bank account which is used for business expenses.

Mixed expenses

If an expense has a business and a private element and these cannot be separated, a deduction is not allowed. An example would be normal clothes worn for work. However, the cost of a uniform featuring the business logo can be deducted.

Capital expenditure

The rules governing the deductibility of capital expenditure can be tricky and depend on the basis used to prepare the accounts. If the tradition accruals basis is used, capital expenditure cannot be deducted in calculating profits. Instead, relief is given through the capital allowances system. Where the annual investment allowance is available, as long as the £1 million limit has not been used up, qualifying capital expenditure can be deducted in full (as a capital allowance) in the year in which it is incurred.

Different rules apply under the cash basis, and capital expenditure can be deducted unless it is of a type for which a deduction is specifically denied. The main items of capital expenditure which are not deductible under the cash basis are land and buildings and cars. Capital allowance may be available instead for cars (as long as simplified expenses have not been claimed).

Common deductible expenses

While the list of deductible expenses will vary from business to business depending on the nature of the business, the following is a list of common deductible expenses:

• cost of goods sold;
• packaging;
• distribution costs;
• staff costs (wages and salaries, pensions);
• premises costs (rent, insurance, light and heat, cleaning, repairs);
• office costs (stationery, phone costs, printing, postage);
• advertising;
• finance costs (but note an interest cap applies under the cash basis); and
• accountancy and legal costs.

Check the list to ensure deductible items have not been overlooked.

The Chancellor’s recent mini-Budget and subsequent U – turns threw a number of spanners into the works as far as profit extraction strategies are concerned. Initial revisions to profit extraction strategies in the light of the mini-Budget announcements now need to be revised.

Rates

For 2022/23, the dividend allowance is £2,000. Where dividends are not sheltered by the dividend allowance or any unused personal allowance, they are taxed at the dividend ordinary rate of 8.25% where they fall in the basic rate band, at the dividend upper rate of 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band.

The rates were increased from 6 April 2022 by 1.25% as part of a package of measures to raise funds for health and adult social care with the introduction of a dedicated Health and Social Care Levy.  The Health and Social Care Levy has since been scrapped. It was announced at the time of the mini-Budget that the increased would be reversed from 6 April 2022. However, new Chancellor Jeremy Hunt subsequently announced that this will now not happen and dividend tax rates will remain at their 2022/23 levels.  The basic rate of income tax was due to fall from 6 April 2023 from 20% to 19%. This cut has now been delayed and the basic rate will remain at 20%.

Extracting profits

If profits from a personal or family company are to be used for personal use, they need to be extracted from the company. There are various ways in which this can be done, but from a tax perspective, the goal is to do so in a way that minimises the total tax and National Insurance payable.

A popular tax efficient strategy is to take a small salary and to extract further profits as dividends. The optimal salary depends on whether the National Insurance employment allowance is available. If it is, as may be the case for a family company, the optimal salary for 2022/23 (assuming the personal allowance has not been used elsewhere) is equal to the personal allowance of £12,570. Personal companies where the sole employee is also a director do not benefit from the employment allowance. Where the employment allowance is not available, the optimal salary for 2022/23 is equal to the annual primary National Insurance threshold of £11,908.

The changes announced in the mini-Budget and the subsequent U-turns do not change the optimal salary for 2022/23.

Taking dividends

Once the optimal salary has been paid, it is more tax efficient to take any further  yet)profits needed outside the company as dividends. Dividends are paid from post-tax profits and have already suffered corporation tax of 19%. The reinstatement of the proposed corporation tax reforms will mean that the funds from which dividends have paid may have suffered a rate of tax of more than 19% from 1 April 2023. This will be the case where profits exceed the lower profits limit, set at £50,000 for a stand-alone company.

For 2022/23, dividends should still be extracted (assuming sufficient retained profits are available) to use up the dividend allowance and any remaining personal allowance of the director and, in a family company scenario, any family members who are shareholders. Once the allowances have been used up, taking any further dividends will trigger a tax liability on those dividends. If the funds are not needed outside the company, it may be preferable not to pay a dividend to avoid the associated tax charge, perhaps delaying the payment of the dividend until it can be sheltered by a future year’s dividend or personal allowance.

Where further dividends are needed, the aim is to pay as little tax as possible. In a family company scenario, this may mean using the basic rate band of family members before paying dividends to the director where they would be taxable at a higher rate. As dividends must be paid in proportion to shareholdings, the tailoring of dividends to achieve this is only possible with an alphabet share structure whereby each family member has their own class of shares.

There is no substitute for crunching the numbers.

If you operate your business as a personal or family company, you will need to extract some or all of the profits if you wish to use them personally. When it comes to tax, not all profit extraction methods are equal. While personal circumstances will dictate the most efficient way for you to extract profits, the following five extraction methods should be considered as part of a tax-efficient profit extraction strategy.

Method 1: salary

Paying a small salary can be tax-efficient where the recipient has not used their personal allowance elsewhere. Paying a salary that is at least equal to the lower earnings limit for National Insurance purposes (£6,396 for 2022/23), will ensure that the tax year is a qualifying year for state pension purposes; this can be useful where the recipient does not already have the 35 qualifying years needed for a full state pension.

For 2022/23, the optimal salary will depend on whether the National Insurance Employment Allowance is available to shelter any employer’s National Insurance on the salary. Assuming the personal allowance remains available in full, the optimal salary where the Employment Allowance is not available (as is the case in a personal company where the sole employee is also a director), is one equal to the primary threshold for 2022/23 of £11,908. If the Employment Allowance is available (or one the higher secondary Class 1 National Insurance thresholds applies), the optimal salary is one equal to the personal allowance, set at £12,570 for 2022/23.

Method 2: dividends

Dividends are paid from post-tax profits, and the profits from which they are paid have already suffered corporation tax. As all taxpayers benefit from a dividend allowance (set at £2,000 for 2022/23), where this remains available, paying a dividend up to this amount allows profits to be extracted free of any further tax. Once the optimal salary has been paid and the dividend allowance has been used, if further profits are needed outside the company, it is generally preferable to take dividends rather than additional salary as the dividend tax rates are lower and there is no National Insurance to pay on dividends.

Remember, dividends must be paid in proportion to shareholdings. However, using an alphabet share structure preserves flexibility. Remember, dividends can only be paid if you have sufficient retained profits from which to pay them.

Method 3: rent

Many personal or family companies are based at home. The company can rent a room from the director and pay rent for the privilege. This can be tax efficient, as the company will benefit from a deduction for the rent paid when calculating its profits for corporation tax purposes. While the rent is taxable in the hands of the director, if the director does not have other rental income, he or she may be able to benefit from the property income allowance to receive £1,000 of rent tax-free. Paying rent has the added advantage that there is no National Insurance to pay.

Method 4: pension contributions

The company can also make pension contributions on behalf of the director (and/or his or her family). The company will usually be able to deduct the pension contributions in full when calculating its profits. Providing the contributions do not exceed the available annual allowance or take total tax relieved contributions above the level of the lifetime allowance, there will be no tax charges on the recipient.

Method 5: benefits-in-kind

It can be particularly tax-efficient to provide directors and family employees with exempt benefits in kind, such as a mobile phone or workplace parking, as the recipient will enjoy the benefit tax-free, while the company can deduct the cost in calculating its taxable profit. Where an exemption applies, there is no Class 1A National Insurance for the company, and most benefits in kind are free of employee National Insurance.

Benefits-in-kind can still be tax efficient even if a tax charge applies; for example, it may be beneficial for the employee to have an electric company car rather than be given more salary from which to fund the car. Providing a benefit rather than additional salary will also save employee’s National Insurance as most benefits-in-kind are liable to Class 1A (employer-only) rather than Class 1.