Client is a sole director of a limited company - he has health insurance and would like to put this through the business. I'm going round in circles trying to work out if whether it is more tax efficient to do this than pay for it privately. If the expense goes through the business he will have a benefit in kind on the P11D and there will be a PAYE / NI charge, although there will be a corporation tax saving. If he pays for it privately the expense will come out of post-tax income but there will be no additional tax / NI to pay as there is no benefit in kind.
I'm probably a little muddled as it's rather late at night, but any advice would be appreciated!
My client is a basic rate taxpayer.
Thank you!
Replies (3)
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Can be tax-effective
If a director has no income other than low salary + dividends then adding Health Care BIK can cost no tax provided that total income is not hih enough to be in the higher rates of tax:
7068 Salary (no tax, no NIC)
400 Health Care BIK
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7468 Total Income
covered in full by PA of £7475 = no tax.
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Class 1A NIC @ 13.8% = £55.20
CT deduction £455.20 @ 20% = £91.04
Net tax / NIC gain £35.84 (this saving might be wiped out by higher accountants fees re: cost of completing P11D if no other BIKs)
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The maths can be done for the (likely) higher actual premium costs which in my experience will rise higher than RPI by a big margin each year. Think of the commerciality of "can I afford Healthcare premiums that will rise by a big margin each year" before committing to this cost, then look at the tax per above.
So say the medical insurance premium is £1,000.
Cost if paid by employer
Premium £1,000
Employer NIC £138
Less Crorporation tax (assume 20%) £227.60
Total cost to company £910.40
PAYE on benefit £200
Total cost to employee £200
Total overall cost £1,110.40
Cost if paid personally
Cost to employer £nil
Cost to employee £1,000
Total overall cost £1,000
Clearly in this scenario it is better for the employee to pay directly to avoid the employer NIC charge. The situation may be different however if the client needs to draw additional income to cover the premium.
If he is a shareholder in the business this could be drawn as a dividend, and as he is a basic rate taxpayer there would be no additional tax cost. If he is not a shareholder and had to draw this out as additional salary to cover the cost, then he would need to draw £1,470 gross from the company to realise £1,000 net to pay the premium. The employer and employee NIC on this would be in the region of £380, and therefore in this instance it would be more beneficial to have the company pay the premium directly.
Also, if other employees are to be included on the policy in the future, the company may be able to benefit from group premium rates if the company contracts directly.
Hope this helps.