You recently formed a new company to operate a subsidiary trade to your main business. How should you take remuneration from it for maximum tax and NI efficiency?
Subsidiary tax planning
Where a company is controlled by another it’s a subsidiary for company law and tax purposes. This has significant consequences for corporation and other taxes which can affect how you and your fellow directors draw income from it to maximise tax efficiency. Generally, dividends are the best option but you can’t be paid these unless you own shares in the company, which if it’s a subsidiary you probably won’t.
Benefits and salary
Where dividends aren’t an option your income alternatives are salary or benefits in kind. Both are taxable earnings but NI is worked out differently for each.
Benefits. Apart from the few tax and NI-exempt benefits, as an employer you have to pay NI (Class 1A) at 15.05% on whatever perks you provide. The good news is that directors (and employees) don’t pay any NI on benefits.
Salary. The first £9,100 per year of salary is NI free. Above that employers pay the same rate of NI (Class 1 rather than Class 1A) as applies to benefits. Directors pay 13.25% on their salary between £11,908 and £50,270 per annum and 3.25% thereafter.
Tip. Providing directors with benefits instead of salary can reduce their NI bill, which increases their take-home income.
Example. Simon is a director of Acom Ltd. In 2022/23 it pays him a salary of £20,000 per year. The Class 1 NI payable is £2,712 (£1,640 by Acom and £1,072 by Simon). If instead Acom paid Simon’s salary of £14,000 but provided him with medical insurance and health club membership costing £6,000 in all, the total NI bill is reduced by £795 because no NI is payable by Simon (the tax position for both Acom and Simon is neutral).
Trap. When taking benefits make sure it’s the company and not the director which contracts with the supplier to provide them. If the director contracts with the supplier and the company pays for the benefit, the NI advantage is lost because the rules say that this type of arrangement must be treated as salary liable to NI.
Low salary trap
Whereas Class 1A is payable on every pound of benefits, Class 1 only applies once salary reaches the annual NI earnings threshold (ET) (£9,100 for employers and £11,908 for directors for 2022/23). Therefore, the salary up to the ET will be more tax efficient than benefits.
Example. Tom and Gerry are directors of Bcom Ltd. All its shares are owned by Acom Ltd. Tom and Gerry take all their income from Acom as dividends. As Bcom can’t pay them dividends it will pay salary plus benefits. Tom takes salary up to the NI ET plus benefits of £10,000. Gerry takes the same amount of income but all as benefits. The total NI bill for Tom is £1,505 (all Class 1A) and Gerry’s is £2,874 (all Class 1A). Gerry has wasted the NI ET by not taking any salary.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.