This article is relevant for contractors or freelancers working through their own UK limited company on contracts within the private sector and small businesses with one or two directors / shareholders.
Extracting monies from your limited company in the most tax efficient way usually involves a combination of taking a low salary and declaring some dividends.
In December 2018, the guidance was amended as to when a director must file a tax return.
Previously, the guidance stated that all directors must file a tax return despite this not being provided for anywhere else in the tax legislation.
The guidance now states that where all of an individual’s income is taxed at source and there is no further tax to pay they do not need to notify HMRC of chargeability and do not need to file a Self-Assessment tax return.
In addition, the guidance no longer specifically states directors must file tax returns.
Pension contributions can be paid both personally and by the company. At the moment, it is often tax efficient in most cases to get your company to make pension contributions, although this may change in the future.
You must be working away from your normal place of work at a temporary workplace to be able to claim for the travelling expenses to get to that temporary workplace. There are special rules which cover employee travel, these are summarised as follows:
Journey from and to
Home > Permanent workplace: Ordinary commuting = Disallowed
Workplace > Workplace: Business travel = Generally allowed
Home > Temporary workplace: Business travel = Allowed
Home > Depot: Ordinary commuting = Disallowed
Home > Sales patch: Ordinary commuting = Disallowed
Workplace > Client/business function: Business travel = Allowed
A temporary workplace is defined as one which an employee visits for a limited or temporary purpose, for a duration of less than 24 months.
Contractors
For most contractors, their office at home is their permanent place of work and their clients’ offices are their temporary workplaces.
However, please be aware of the 24-month expenses rule, which says that after 24 months consecutive work at one location a contractor can no longer call this place a temporary workplace and can no longer claim expenses.
Also, if a contractor creates a limited company specifically for the purpose of working on a particular contract at a single location, with no other contracts before or after, they will find it hard to convince HMRC that their expenses claims are legitimate.
These are small perks that an employer can provide to their employees without having to pay tax on them. Trivial benefits that are exempt from income tax are automatically be exempt from Class 1A NIC from 6 April 2016.
Trivial benefits will mainly consist of gifts to staff or members of their family on special occasions such as Christmas, birthdays, marriage or the birth of a child.
Conditions:
- They cannot be more than £50 per benefit (1p over and the full value of the benefit is taxable)
- Benefit must not be a cash payment - however gift vouchers are allowed (but only as long as they cannot be exchanged for actual cash) Gift vouchers must be purchased at separate times from online retailers (e.g. Tesco/Amazon) otherwise they are viewed as a single benefit.
- There is no entitlement to the benefit as part of the employee’s contract (including salary sacrifice schemes).
- It is not provided in recognition of a work-related service or employment duty.
- The exemption is an ‘all or nothing’ exemption: if the value of the benefit is £60 then the full amount of £60 is taxable, not just the £10 excess.
- Directors, office holders and employees who are members of their family and household are subject to an annual cap of £300.
Examples of what is allowed:
- Flowers
- Chocolates
- Wine (not vintage wine for investment)
- Hampers
- Taking staff for meal
- Providing a working lunch for employees (because this is related to their employment).
- Gifts, incentives or events related to performance targets or results.
- Gifts, incentives or events in relation to employment services e.g. team-building events.
- Taxis when employees work late
- An ongoing or reoccurring cost. e.g. yearly gym membership/annual broadband
Examples
Scenario 1: Celebrating Birthdays
You take a group of your employees out for a meal to celebrate their birthdays. Five employees attend the meal at a cost to you of £240. Each of the employees choose a different selection of food and drinks. The cost per head works out at £48, if the bill is split evenly. This can be covered by the exemption since the cost for each individual does not exceed the trivial benefit limit.
Scenario 2: Staff Parties
As director, you decide you want to provide your employees with two annual functions, one at Christmas and one in the summer. The first function costs £140 a head and the second costs £40. The first function is exempt by virtue of the annual parties function exemption. The second would be considered a trivial benefit in kind because it does not exceed £50.
Scenario 3: Director Benefits
As a director you are provided with 3 bottles of wine that cost £30, £40 and £50 respectively in a single tax year. The total cost of the benefits is £120. The total cost does not exceed the annual exempt amount of £300 and all of the benefits can be covered by the exemption.
HMRC Example 1
Mr and Mrs Smith are directors of a close company and their daughter Jo is an employee.
- In October Mrs Smith receives a bottle of wine from the company for her birthday.
- The cost to the company is £30 and this amount is deducted from her annual cap of £300, leaving her an available exempt amount for any future trivial BIKs in the tax year of £270. - At Christmas Mr and Mrs Smith both receive a gift from the company that cost the company £50 each, and their daughter receives a gift costing £25.
- As Mr Smith has not received any other trivial BiKs, the cost of the Christmas gift is deducted from his annual cap of £300, leaving him an available exempt amount for any future trivial BiKs in the tax year of £250.
- For Mrs Smith, the cost of her Christmas gift is deducted from her available exempt amount of £270, leaving her an amount to set against any further trivial BiKs in the tax year of £220.
- Jo is an employee, but as she is also a member of the directors’ family, an annual £300 cap applies to her. The cost of her Christmas gift must be deducted from her cap, leaving her with an available exempt amount of £275 for any future trivial BiKs in the tax year.
Comment:
Jo is a member of Mr & Mrs Smith’s family and so benefits provided to her are subject to an annual £300 cap. She is an employee of the company in her own right and so she has her own cap of £300.
HMRC Example 2
Peter and his brother George, are directors of a close company. They have a sister, Sarah, who is not an employee of the company. Due to the provision of eligible trivial BiKs earlier in the tax year, Peter has an available exempt amount of £55 and George has £95.
At Christmas they are each provided with a turkey by the company, each costing the company £50.
- The available exempt amount for both Peter and George will be reduced by the cost of their own turkeys, leaving £5 and £45 respectively.
- As Sarah is not an employee, the cost of her turkey must be allocated equally between any employees who are members of her family or household and directors or other-office holders of the company.
- This means that an amount of £25 (£50/2) will be allocated to each of her brothers and deducted from their available exempt amounts.
- Peter will exceed his annual exempt amount of £300, as he only has £5 available. As the exemption is an all or nothing provision, he will be liable to tax on the full allocated amount of £25.
- George’s available exempt amount is sufficient for the allocated amount to be fully covered, and he has £20 (£45-£25) available for any future trivial BiKs in the tax year.
