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For many years the most tax-efficient method of withdrawing monies from a company by a sole director/owner has been to take salary up to the employer's secondary employer's NIC limit, with the balance taken as dividends. However, since July 2022, this standard calculation has changed such that withdrawing profits in the form of benefits in kind (BIK) may now be a consideration.
By setting the employee primary NIC threshold and the personal allowance at the same amount of £12,570 and retaining the employer's secondary threshold for NIC at £9,100 (for 2024/25), any director can withdraw an amount up to the secondary threshold, without incurring tax or NIC charges for either the employee or employer whether the employment allowance (EA) is available or not,. Any additional withdrawals can be taken as dividends which do not attract NIC.
However, should the EA not be available (as is the situation where a company has a sole director-employee'), the employer is liable for NIC on the amount greater than £9,100. Corporation tax relief is available on the whole amount, such that paying an 'optimal' salary of £12,570, the corporation tax deduction outweighs the amount of NIC due by £508.36 per employee (assuming corporation tax rate of 25%).
Although calculations need to be made on a person-by-person basis and assuming the full available amount is withdrawn, as a generalisation for the year 2024/25 calculations show that:
- Taking a salary up to the personal allowance of £12,570 with the balance as dividends is a more tax-efficient method of extraction up to £134,000;
- For withdrawals between £134,000 and £411,000, the amount is £9,100 in salary with the balance as dividends; and
- For withdrawals over £411,000, taking the whole amount as salary under payroll conditions is the most tax-efficient method.
Note that the calculations will be different for the 2025/26 tax year as the NIC percentages and limits are to be changed.
When are benefits more tax efficient?
There is another method of withdrawing profits that can prove even more tax/NIC efficient. As a generalisation, BIK are more efficient than salary, but less efficient than taking a dividend.
BIK will be more tax efficient than dividends where they are exempt from tax and NIC or where the calculation of the taxable benefit results in a low taxable amount, e.g. zero or low emissions company cars. In such a scenario, the recipient pays no or little tax but the company receives a tax deduction.
An advantage of BIK is that they can be provided even if the company is loss making.
Company cars
If a company car is provided, it may be more tax efficient than taking additional salary, especially if the car has low CO2 emissions or is a plug-in hybrid or electric vehicle. The BIK rate for electric cars is usually much lower than for high-emission vehicles. The value of the benefit is increased by including maintenance, servicing and repairs, road tax, insurance and sat navs, which are all tax deductible against corporation tax being paid for by the company but not taxable on the director. HMRC will not charge tax on extras with a list price totalling £100.
Pension contributions
Employer contributions to a pension scheme can be a highly tax-efficient benefit because they are typically not subject to income tax or NIC. Additionally, they can be deducted from the company's taxable profits, thereby reducing company taxes.
Practical point
Taking BIK works best when the director does not need extra cash income or the benefit would otherwise have to be met from cash resources. A mobile phone contract is a typical benefit as no tax or NIC is payable where one mobile phone is provided and the phone contract is between the company and the supplier. The company can obtain corporation tax relief on purchase without tax or NIC implications for the director.
Partner note:
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