There are many ways to extract income from your company, but they all boil down to just three broad types: salary, benefits in kind and dividends. They each have their place but dividends rule the roost for tax efficiency in most circumstances.
Once you have received a taxable benefit, such as a company perk or allowance, it triggers the income tax and Class 1ANational Insurance liability. However, the benefit rules include a let-out provision that allows you to cancel both the tax and National Insurance liabilities. This is achieved by personally reimbursing your company with a sum equal to the taxable amount of the benefit received. This process is commonly referred to as "making good." By "making good," you effectively nullify the tax and National Insurance liabilities associated with the benefit, ensuring compliance with tax regulations while minimising your financial obligations.
You can make good a benefit using your personal funds or alternatively your company could pay you an additional dividend which you pay straight back to the company.
As shown by the example below, making good through an extra dividend has the advantage of reducing and deferring the tax cost and eliminating the Class 1 NI liability. Remember, dividends can only be paid out of profits. Companies with accumulated losses cannot pay dividends.
Example. In June 2022, Arthur, the director and sole shareholder of Acom Ltd, used his company credit card to pay £4,500for his summer holiday and his partner's. Normally, Acom would report this benefit to HMRC on Form P11D by 6 July 2023. As a higher rate taxpayer, Arthur would be taxed on the benefit of £1,800 (£4,500 x 40%) payable by 31 January2024, with Acom liable for Class 1A NI of £621 payable by 21 July 2023.However, by making good with the dividend declared on or before 6 July, Arthur's tax bill is reduced to £1,518 (£4,500 x 33.75%), and Acom's NI bill is reduced to zero. Additionally, the tax on the dividend is payable a year later on 31 January 2025.
The tax savings made by Arthur are offset because Acom loses the corporate tax deduction it would have received for the benefit if it hadn't been rectified. This decreases the overall tax savings but has no impact on the tax deferral.
When it comes to taxes, each individual has their specific situation and requirements, so why not tap into the expert resources at Elena Meskhi & Co? Our staff is dedicated to helping clients understand complicated tax laws and strategies to maximise available tax benefits. With exceptional customer support and quality service, we strive to make sure you get the best out of your investments. So don't wait any longer - book a call with us today and let our team help you move forward with confidence towards a financial future that's designed by you for your success!
