As a limited company contractor, you’ll probably pay yourself a combination of salary and benefits. These could range from cars and telephones to annual event (such as a Christmas party) and childcare.
If you decide to issue a non-cash benefit, you’ll need to put a value on it for tax purposes. If there’s no monetary value, there will be no additional tax to be paid - simple. If it is convertible into cash, then you’ll have to pay tax on its market value.
When looking at the tax implications of any benefit, you’ll need to carry out two basic tests. They are:
- If the benefit is taxable
- What its taxable value is
We know this may sound confusing, but thankfully help is at hand. We’ve created this handy guide to explain the different type of benefits, plus your obligations as a company director.
If you issue vouchers or credit tokens, or provide accommodation (unless job related), you’ll be charged via your self-assessment at a rate of 20%, 40% or 45% depending on your tax threshold. Your business will be charged at the rate of 13.8%.
Any other taxable benefits are subject to special rules. Common types of benefits are:
- Company cars
This is probably the most common benefit issued by company directors. The taxable amount is usually 5% to 37% of the manufacturer’s list price, including accessories. The tax you’ll pay depends on the car’s carbon dioxide emissions.
- Private fuel
A separate charge applies if you provide fuel on top of the car itself – unless the cost of this is reimbursed. To work out how much is charged, simply take the taxable amount of the car and multiply it by £24,100.
For more information about working out the benefit in kind on cars, please see our guide.
- Cheap or interest-free loans
If you issue a loan of under £10,000 in value, there will be no benefit in kind to consider. If you borrow more than this amount, and you do not pay any interest on the value of the loan, this will be regarded as a taxable benefit. The value of the benefit will be calculated as the interest that should have been charged and HMRC will use the official rate of interest, 2.5% for the 2020/21 tax year. This means that on a loan of £10,000, the value of the benefit would be £250. This amount would be declared on your P11d and the Class 1A national insurance liability calculated at 13.8%, it would also be included on your self-assessment tax return and be taxed at the appropriate rate.
Please be aware that a directors loan of any amount may give rise to an S455 charge of 32.5% of the balance outstanding. Before taking a loan from the business you should discuss this with your accountant.
- Medical insurance
You’ll also need to pay tax if you provide medical insurance, including permanent health cover and private medical cover. This is charged at 20%, 40% or 45% depending on your Income Tax threshold, while your company will pay tax at 13.8%.
- Use of company assets
If you have the private use of company assets (such as a laptop or office furniture), you won’t have to pay tax if the use of certain assets is deemed to be insignificant – for example if it’s only for personal use 20% of the time. Any significant use is charged at 20%, 40% or 45% of the asset’s value (according to your personal tax threshold), while your company will pay 13.8%.
All private home and mobile telephone bills, including rental charges are taxable. However, you won’t have anything to pay for private calls using a company mobile phone.
- Annual company events
You won’t be charged tax for social gatherings such as a Christmas party, provided the total cost of all events is less than £150 per head for the whole tax year.
Your company can make payments to an OFSTED registered childcare provider to a value of £55 per week or £243 per month. This amount drops to £28 per week or £124 per month if employment income is in the higher rate, and £25 per week or £110 per month if at the additional rate.
This applies to all formal registered childcare services or approved home childcare.
The new scheme introduced in 2018 means that the current Childcare Voucher Scheme is unavailable to new applicants. Under the new Tax-Free Childcare Scheme, the government will pay 20p for every 80p you spend up to £2,000, meaning you can get up to £2,000 per child up to £10,000 to help cover the costs.
There are a number of benefits that you won’t have to pay tax on. Here are just a few:
- Retirement benefits paid by an employer into a registered pension scheme
- Meals provided in a staff canteen
- Drinks and light refreshments at work
- Parking provided at or near an employee’s place of work
- Workplace nursery places provided for the children of employees
- In-house sports facilities
- Payments for additional household costs incurred by an employee who works at home
- Removal and relocation expenses up to a maximum of £8,000 per move
- The provision of a mobile phone or vouchers to buy a mobile phone (limited to one phone per person)
As a company director, you’ll need to let HMRC know about the benefits your company provides by completing an annual P11D form or via payrolling the benefit. The P11D is due to be filed by 6th July after the fiscal year end. You must include the full amount of any benefit or reimbursed expense, unless it is covered by the exemptions.
Remember to submit your forms on time, as penalties can apply if you supply them late, or they’re incorrect.
In general, you won’t need to pay Employees’ National Insurance on the vast majority of benefits – with the exception of vouchers (such as gift cards) and stocks and shares. You’ll also be charged tax if you gift a good or service to an employee rather than paying them a salary, thereby avoiding Income Tax and National Insurance.
Most benefits will be subject to Class 1A National Insurance, which the company will need to pay. This currently stands at 13.8%.
Need more help?
We hope this guide has managed to shed some light on the different employment benefits available to company directors. If you need more advice, rest assured that help is at hand.
At ClearSky Contractor Accounting, we’re committed to offering you expert advice to manage your finances in the most tax-efficient way possible. As a founding member of the Freelancer and Contractor Services Association (FCSA), compliance is at the heart of everything we do – meaning you’ll remain whiter than white at all times.
We’ll be with you all the way throughout your contracting career, whenever you need us. We understand everybody’s different, so we’ll tailor our advice to suit your own personal circumstances.