The tax-efficient employee benefits many small companies still overlook
For many UK owner-managed businesses, tax planning tends to focus on salaries, dividends and pension contributions. Those decisions remain important, but they are only part of the picture. The benefits a company provides to its employees – particularly where directors are also shareholders – can have a significant impact on both the overall tax position of the business and the value employees receive.
Many of the most tax-efficient employee benefits have been available for years, yet remain underused by smaller companies. In some cases that is because directors assume they are intended for larger employers. In others, it is simply because they have never revisited the options since setting up the business.
As Corporation Tax, National Insurance and employment taxes continue to evolve, taking a fresh look at employee benefits can often uncover opportunities that have been overlooked.
Relevant Life Insurance
One benefit that continues to attract growing interest among accountants and financial advisers is Relevant Life Insurance.
Unlike a standard personal life insurance policy, a Relevant Life policy is arranged and paid for by the employer on behalf of an employee or director. For many owner-managed companies, that can result in a significantly more tax-efficient way of providing life cover than funding a policy personally.
Where the relevant conditions are met, premiums will generally qualify as an allowable business expense for Corporation Tax purposes and do not usually create a Benefit in Kind for the employee. That combination makes the product particularly attractive for directors of small limited companies who want to protect their families while making the most of the tax reliefs available to the business.
The product is often misunderstood, however. Questions regularly arise around trusts, eligibility, Corporation Tax treatment and how it differs from personal life insurance. As a result, many directors dismiss it without fully understanding how relevant life cover works and whether it could benefit their own circumstances.
Employer pension contributions
Employer pension contributions remain one of the most tax-efficient ways of extracting value from a limited company.
Unlike salary, employer contributions are generally not subject to Income Tax or National Insurance when paid into a registered pension scheme. The company may also receive Corporation Tax relief where the contribution is incurred wholly and exclusively for the purposes of the business.
While pensions have long formed part of remuneration planning, they are often most effective when considered alongside other tax-efficient benefits rather than in isolation.
Electric company cars
Electric vehicles continue to offer attractive tax advantages for many businesses.
Although purchase prices remain higher than some petrol or diesel alternatives, the combination of low Benefit in Kind rates and favourable capital allowance rules means the overall cost can compare favourably once tax is taken into account.
For businesses replacing company vehicles over the coming years, it is often worth revisiting the figures rather than relying on assumptions made several years ago.
Professional development
Training is another area where tax efficiency and commercial benefit frequently go hand in hand.
Where training is intended to maintain or improve employees’ existing knowledge and skills, the cost will generally qualify as a business expense. At the same time, investing in professional development helps businesses retain experienced staff and improve productivity.
For smaller professional firms, technology businesses and consultancies, keeping skills up to date has become a commercial necessity rather than simply an employee benefit.
Private medical insurance
Private medical insurance remains a popular benefit despite generally creating a taxable Benefit in Kind.
Many employers consider the additional tax cost worthwhile because quicker access to treatment can reduce sickness absence and improve staff retention. In sectors where recruiting experienced employees is difficult, health benefits can also provide a competitive advantage.
Employment status and tax risk
Employee benefits should not be viewed in isolation from wider tax planning.
Businesses that engage contractors alongside employees also need to consider employment status, particularly where off-payroll working rules may apply. While the legislation itself has changed little in recent years, the interpretation of IR35 continues to develop through tribunal decisions.
Those cases regularly reinforce that employment status depends on the reality of the working relationship rather than any single contractual clause. Control, substitution, mutuality of obligation and numerous other factors continue to be weighed by the courts when deciding whether IR35 applies.
The growing body of IR35 case law demonstrates how individual decisions continue to shape the interpretation of employment status, providing valuable guidance for businesses engaging contractors and advisers assessing tax risk.
Looking beyond salaries and dividends
For many smaller companies, the most effective remuneration strategy is no longer simply about deciding how much salary to pay alongside dividends.
Pensions, tax-efficient employee benefits and appropriate insurance arrangements can all contribute to a more balanced approach, particularly where directors are looking to protect both the business and their personal finances.
That is especially relevant for contractors, consultants and other owner-managed businesses operating through limited companies, where relatively small changes to tax legislation can have a noticeable effect on overall remuneration. Resources such as ITContracting.com provide regular analysis of the tax, compliance and financial issues affecting contractors and company directors.
Reviewing employee benefits does not necessarily mean introducing entirely new arrangements. In many cases, it simply means taking another look at benefits that have existed for years but continue to offer genuine tax advantages when implemented correctly. For smaller companies prepared to do that, the savings can be more significant than many directors expect.