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November 6, 2014

Benefits in kind as an alternative to dividends

It is often believed that it is most tax efficient for a profit making limited company to draw dividends by its directors. Many shareholders draw their salaries in accordance with the NI earning threshold and pay themselves the rest of their income in dividends.

How do benefits in kind work?

Only a few shareholders realise the advantages that benefits in kind may offer to them. Unlike dividends, benefits in kind are not directly paid as cash to your bank or pocket. Instead, they are an alternative to cash when a shareholder can cover the costs of certain expenses, which would normally be paid for by his or her already taxed income.

There are two types of benefits in kind. The first type is liable to income tax and NI. Using this type is more efficient than salary of equal value but less efficient than paying dividends. The second type is exempted from any tax. The examples of non-taxable benefits are:

  • Free or subsidised meals in the workplace.
  • Expenses of providing a pension.
  • Health screening and medical check-ups.
  • Certain retraining costs paid by the company.

For more examples with explanations please click on: HMRC HS207.

Advantages of benefits in kind

Benefits in kind not only save your company money on income and corporation tax but also can be provided when the company does not make any profits. This is one of the greatest advantages since dividends can only be paid out of company’s profits.

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