If you on your own company it can be tempting to put things like your children’s driving lessons or extra-curricular activities through the business. But is this a cheaper & more tax-efficient option than paying for it personally?
If you are the director of the company then you can put through whatever expenses you like provided they are recorded and the correct national insurance & tax is paid on them. However, if they are personal expenses then there is no tax or national insurance saving. So while the money comes out of the company bank account and not yours, you could easily just pay yourself a bonus to cover the expenses.
Say, for example, you want to send your daughter to stage school. The company would probably need to pay you a lot more in order to meet the cost. For example, if you’re a 40% taxpayer & need £1000 to cover the bill, your company will need to pay you an extra £1724. After tax and the correct amount of national insurance have been paid, this will leave you the correct amount needed for her tuition. But your company will still have to pay Class 1 national insurance at 13.8% on the extra pay i.e. £238. One advantage though is that it will get a corporation tax deduction on the total cost of £1962 (£1724 + £238).
The Dividend Option
One option that would be more tax and national insurance efficient would be to take an extra dividend from the company. Using the same example as above, a dividend of £1481 would be required to produce a tax net of £1000. Even though the company won’t receive a tax dividend, it is overall a slightly more tax-efficient arrangement.
A Company Bill
A third option could be to arrange the tuition through the company and then get the stage school to pay the bill directly. You won’t have to pay any national insurance this way as this will count as a benefit in kind, however this will only be a saving of £20 (£1000 x 2%). You would also need to find the cash to then pay your personal tax bill of £400 (£1000 x 40%). But don’t forget that your company will also have to pay Class 1A national insurance at 13.8% on the £1000.
Helpful tip: a more tax & national insurance efficient method would be to put your daughter to work for your business during term breaks. This is better than taking a dividend because she will only be taxed on her earnings at a max of basic rate (and not at all if her total income per annum is less than the tax-free allowance which is £11000 for 2016-2017).
Pitfall: for this to work your daughter has to genuinely work for your company and be paid at a commercial rate. Obviously the rate depends on the type of work they are doing, but around £7 per hour is acceptable for more menial jobs like filing or admin.
Example: so if your daughter has no other income and you pay her £7 per hour for working 15 hours per week, after ten weeks, she will have worked off the cost of her tuition. Your company will receive a tax deduction for her wages, but her wages don’t need to be inflated to cover tax/national insurance because they fall below the tax-free allowance & national insurance threshold. So it would appear that making your daughter work for your company is probably the most tax & national insurance efficient option for you & your business!
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