Benefiting the owner-managers: The best remuneration strategies Part 1

Extracting profits in a tax efficient manner from a company is always a key interest of owner-mangers. It is also a major factor in building wealth. There are many things that don’t work anymore - but there are some often overlooked ways to extract funds in a tax efficient manner. Whilst many of these are individually small, together they can add up to create a significant saving in tax payable over time.

Of course, formulating the most tax-efficient remuneration strategy is possible, but you must focus too on what the owner-manager needs to take to support their lifestyle!

Building the perfect remuneration plan can be difficult as it has many moving pieces, and so to allow me to cover a range of examples, I split it into several parts:

• Part One: Exempt or tax efficient benefits (this article)
• Part Two: What’s better, salary or dividends? (With examples!)
• Part Three: Putting it all together - building the perfect remuneration plan

Optional Remuneration Rules

Before the optional remuneration rules existed, there was a lot which could be done to save on the owner-manager’s tax bill when extracting profits. Now, there are very few options available for which the savings remain. We discuss what does still exist below, along with how much tax it might save the owner-manager.

Car Parking

If an employer provides or reimburses car parking costs at or near the employee’s workplace, this is normally exempt from tax and national insurance contributions. Note, that if the employee sacrifices salary for the parking cost, then the optional remuneration rules are engaged instead, so to get the maximum personal tax saving, it is necessary that this is just provided, rather than exchanged for salary given up.

There are various news articles about the average cost of car parking at work - ranging from £5/day to £15/day. It will, of course, depend on the location of the office and in which part of the UK you are. However, it is possible to get annual permits which already offer a saving. Add to that the potential tax and NIC saving, a car parking permit costing £1,000/year provided by the company could save up to £2,500 in tax and national insurance contributions over paying for the parking out of personally taxed income (for an individual that is earning between £100-125k with a student loan - i.e., paying a marginal rate of 71%).

Trivial Benefits

It is possible to pay trivial benefits to employees up to £50 a time. (Note: that an e-gift card which is re-loaded is counted in aggregate). Directors of a close company are limited to a maximum of £300/year of trivial benefits. However, if there are two directors (perhaps husband and wife?) it is possible for the company to pay them £300 each in trivial benefits a year. New voucher cards should be used each time to ensure that the benefits are not cumulated and breach the £50 limit per benefit.

Cycle to work scheme

This might seem like a cop-out to all the non-cyclists out there, but hear me out. Cycling is good for you, and it is a good way to get around. Purchasing a bike through your company can be very tax efficient, but there are some pitfalls to watch out for. Firstly, the bike should be used more than it isn’t for ‘qualifying journeys’. These include commuting to an office, or to see clients. It can include cycling to a station for an onward commuting journey. I’ve never known HMRC to check this, but strictly the condition applies. The bike must belong to the company and some care must be taken around the consumer credit rules. There are exemptions for bikes costing less than £1,000 which are lent to employees. However, if the bike costs over £1,000, you should check whether you need a credit consumer licence (or alternatively, use a cycle to work scheme provider who should have their own).

Pensions

Whilst we’re on the topic of easy-outs, pensions are another no-brainer way to extract value from a company in a tax efficient way. Of course, for those not eligible to take their pension for a long time, this might not really seem like a way to extract profits! However, it shouldn’t be overlooked, because it is a vital part of creating and protecting wealth for the future. Taking profits of £60,000 out as a dividend and investing in an ISA, for example, would result in a total investment pot of 27,800 for an additional rate taxpayer. That investment would have to really go up in value to match the £60,000 which could have been invested straight into the pension (subject to the usual annual allowances and potentially protected lifetime limit which one may not want to disturb).

It is possible for owner-managers to set up a small self-administered scheme, which can give them the flexibility to control their investments in a way many other pensions do not - although these come with their own complexity and care must always be taken to avoid unauthorised payments and the potential for scheme sanction charges which can be punitive.

Eyes tests & spectacles

If someone needs glasses solely for ‘display screen equipment’ work, they can be provided tax free if they are available to all employees. Eye tests can always be provided tax free for employees. Perhaps not a big saving - but if you wear glasses and need them for a computer screen - getting them tax free rather than out of your taxed income makes sense!

Health screening and check-ups

Once a year, a company can provide (directly, or via vouchers) health screening and check-ups. Again, for many people this isn’t necessarily something high on the agenda. However, if it is something you were going to do anyway, getting the company to pay for it could save you a decent amount of tax.

Employer provided mobile phone

Most owner-managers I know end up using their personal mobile for work. Due to always being online, they tend to have one of the top-of-the-range mobile plans, to ensure they get all the data they need to run their business from their mobile device. If the company pays for this, there is no benefit in kind for the owner-manager - provided the contract is in the name of the company. The VAT generally does not need to be apportioned, provided there is no separate charge for calls, although if there is significant private use so that HMRC deem the whole provision of a mobile to be a non-business expense, there may not be any right to recover VAT. A top of the range mobile contract can be over £100, so a total cost of £1,200. To pay that out of post-tax income, a higher rate taxpayer would need to be getting £2,068. Using the company to pay for it saves £800/year in tax.

You should note that reimbursement of the cost of a phone contract to the owner-manager attracts income tax and national insurance as normal. As the cost is theirs under a contract (a ‘pecuniary liability’), the company is meeting an existing obligation of the owner-manager and it becomes taxable.

Low-emissions cars

Electric vehicles offered an amazing tax-incentive for such a long time. Whilst the generosity of the reliefs is reducing substantially, there is now much more electric car choice. The benefit in kind on a low-emission car is still very low. The benefit in kind rates are increasing over the next few years so that zero emissions vehicles reach 5% benefit in kind. They can still access capital allowances and therefore offer some significant tax savings. However, as the residual prices on used electric cars have come down significantly in recent years, looking at a used electric company car can still be a viable option to save on the initial cash outlay, despite not qualifying for first-year allowances.

Fuel-benefit

It is possible for a company to pay mileage rates for employees using their own vehicles at 45p/mile for the first 10,000 miles and then 12p per mile for all the miles after that. However, where a company continues to pay 45p/mile after the first 10,000 miles, there is no national insurance on this amount. This can save significant amounts for employees doing significant miles in a private vehicle.

Working from home allowances

Where an employee must work from home, it is possible for their costs to be reimbursed by the company. HMRC allow a flat £6 per week cost to be used instead of calculating the specific costs. During the Covid-19 pandemic, it was possible for almost everyone that worked from home to claim this. Now though, HMRC are back to only allowing claimants where working from home is a necessity, rather than just a choice. If there is a requirement to work from home (perhaps the office space isn’t private, and so the owner-manager completes sensitive work from home, for example) then a claim can be made.

Interest

Last but not least on our list of tax efficient reliefs and exemptions is the reduced rates for interest income. A basic rate taxpayer can receive £1,000 of interest and pay no tax on it. For a higher rate taxpayer this is reduced to £500 and an additional rate taxpayer gets no allowance. In addition to this, though, it is possible for an owner-manager to control their pay, so that they do not have any income over £12,570 except for interest and dividends. In this case, they will be entitled to access the starting rate for savings, which is a £5,000 0% tax rate on savings. This means someone could receive £19,070 of income and pay absolutely no income tax, whilst still getting a corporation tax deduction for most of this! (£12,570 salary, £6,000 interest, and £500 dividends).

It should be remembered, that where interest is paid on loans the rate must be at a commercial level. If the interest rate is above this, the non-commercial securities rules in section 1000(1)E CTA 2010 mean that the amount paid is treated as a distribution. The effect is that it would not be eligible for a corporation tax deduction and would attract tax at the dividend rates. It is unlikely that anyone that is owed less than around £60,000 from their company would be able to make the maximum use of this, and that would suppose a company borrowing at a 10% interest rate. However, it can also apply to interest from other sources.

What next?

Next time, we will review whether dividends or salaries still provide the most tax effective remuneration.

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