When is salary more efficient than benefits-in-kind?
Usually, the total NI bill on benefits in kind is less than that for an equivalent amount of salary. However, in some circumstances the position is reversed. In what situation can this work in your favour when planning your remuneration?
NI and benefits
Benefits in kind can play an important role in tax and NI-efficient remuneration planning for company owner managers. The taxable amount depends on the type of benefit. There are different rules and different calculations for varying types of benefit. The NI payable on benefits is based on the taxable amount. However, there’s a fundamental difference between NI on salary and that for benefits.
No employees’ NI
While the 13.8% rate (14.53% for 2022/23) of Class 1A NI employers have to pay on benefits in kind is the same as the Class 1 NI payable on salary, employees aren’t liable to NI on benefits as they are on salary.
Tip. Providing directors and employees with benefits instead of salary reduces their NI bill and so increases the net value of the remuneration.
Example. Eddie is a director and the main shareholder of Acom Ltd. In 2023/24, as part of his remuneration, it arranges and contracts with suppliers to pay for his medical insurance, gym membership and golf club fees. They would have cost him £5,000 had he paid them personally. His tax bill for the benefits is the same as it would be had he received the same amount of salary. However, unlike salary, Eddie doesn’t have to pay NI on the benefits. This saves him between £100 and £600 (£5,000 x 2% or 12%).
Benefits on which employees pay NI
In our example the benefits are more NI efficient than the equivalent amount of salary. Had Eddie arranged his own medical insurance etc. with Acom paying the bills, this would still be a benefit in kind for tax purposes, but for NI it would count as extra salary liable to Class 1 and not Class 1A. Therefore, Acom would be required to collect employees’ NI from Eddie on the value of the bills it paid.
NI planning for benefits
Class 1A applies on every pound of benefit in kind provided whereas Class 1 only applies to salary (including benefits which count as salary) where it’s in excess of the primary NI threshold (£12,570). This is an important factor when planning your remuneration.
Where for NI purposes benefits in kind are treated in the same way as salary, you can use this to your advantage if you’re the director of a company and can control how much and what form your remuneration takes.
Example. Eddie, from our earlier example, receives all his income from Acom as dividends except for £4,000 salary and the £5,000 worth of benefits. Acom must pay £690 Class 1A NI (£5,000 x 13.8%) on the benefits. Eddie doesn’t have to pay NI on them. However, if instead Eddie contracted for the benefits but Acom pays for them, the payments count as salary for NI purposes. Because this is treated as salary there’s no Class 1A NI and because his earnings liable to Class 1 NI are £9,000 (£4,000 + £5,000) there’s no Class 1 NI payable because that amount is less than the primary NI threshold and also less than the threshold at which employers start to pay NI (£9,100). So, in this case salary that includes benefits treated as salary is more tax efficient than benefits in kind that are subject to Class 1A NI.
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