Exploring Tax Efficiency: Benefits in Kind vs. Salary and Dividends

Introduction

Historically, the most tax-efficient way for sole directors/owners to withdraw money from their company has been through a mix of salary (up to the employer’s secondary National Insurance Contributions (NIC) limit) and dividends. However, changes since July 2022 have introduced scenarios where taking benefits in kind (BIK) could offer a more favorable alternative. This blog explores when and why BIK might be a better choice for tax efficiency compared to salary and dividends.

Understanding the Basics: Salary and Dividends

The traditional approach involves:

• Salary: Withdrawn up to the secondary NIC threshold (£9,100 for 2024/25) without incurring NIC or income tax, regardless of Employment Allowance (EA).
• Dividends: Additional withdrawals are taken as dividends, which are not subject to NIC.

When EA is unavailable, such as for companies with a sole director-employee, employers must pay NIC on amounts above the £9,100 threshold. Even so, the corporation tax relief on an optimal salary of £12,570 outweighs the NIC cost, providing a net tax saving of £508.36 per employee (assuming a corporation tax rate of 25%).

Optimal Strategy by Income Level (2024/25):

1. Up to £134,000: A salary of £12,570 and the balance as dividends is most tax efficient.
2. Between £134,000 and £411,000: A salary of £9,100 and the rest as dividends is optimal.
3. Above £411,000: Taking the full amount as salary is the most tax-efficient.

Note: These figures are subject to change for the 2025/26 tax year due to planned NIC adjustments.

When Benefits in Kind Are More Tax Efficient

Benefits in Kind can be more tax-efficient than salary and, in some cases, even dividends. BIKs are especially advantageous when they are either:

• Exempt from tax and NIC
• Taxed at a reduced rate due to a low taxable value (e.g., zero or low-emissions company cars).

For instance, low-emission or electric company cars often attract minimal tax while allowing the company to claim corporation tax relief. Similarly, certain benefits like employer-funded pensions or mobile phone contracts offer tax advantages.

Key Advantages of BIK:

1. Tax Savings: Taxable benefits can sometimes result in little to no tax liability for the director while allowing the company to claim tax deductions.
2. Usability in Loss-Making Companies: BIK can still be provided even if the company is not generating profits.
3. Additional Perks: Certain extras (e.g., car maintenance or insurance) are tax-deductible for the company but not taxable for the director.

Examples of Efficient Benefits in Kind

1. Company Cars

Low-emission or electric vehicles are particularly tax-efficient. Their taxable BIK rate is significantly lower than that of high-emission vehicles, and associated costs like maintenance, road tax, and insurance are deductible for the company.

2. Pension Contributions

Employer contributions to pension schemes are an excellent way to save on taxes, as they are not subject to income tax or NIC and are deductible from the company’s taxable profits.

3. Mobile Phone Contracts

A common and efficient BIK is providing a mobile phone with a contract between the company and the supplier. Neither the director nor the company pays tax or NIC, yet the company enjoys tax relief on the cost.

Practical Considerations

Taking BIK is most advantageous when:

• The director does not need additional cash income.
• The benefit would otherwise be an out-of-pocket expense.

For example, directors who require a company-funded mobile phone or electric vehicle will find the tax savings substantial.

Conclusion

While salary and dividends remain core profit extraction methods, incorporating BIK into the mix can unlock significant tax efficiencies, particularly for exempt or low-taxable-value benefits. Careful planning and personal calculations are essential to determine the optimal strategy based on income level and specific company circumstances.

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