There are certain conditions to meet when you claim for Trivial Benefits as business expenses. Please note, there are two good aspects when you claim for these through your company:
you receive the benefit of the allowance on a personal basis; and
your business saves tax on this at the same time.
Trivial benefits are a recent entry into the UK tax system. They were first brought in on 6 April 2016. Indeed, Trivial Benefits cover the scenario where a business makes rewards to its directors and staff. The allowance is tax-free, and I would advise that you claim for this, if you qualify. What’s more, it is also an excellent way to reward directors and employees throughout the year.
Most importantly, this expense is not well known. Lots who can claim overlook to do this. Many contractors, due to a lack of awareness, do not even know that this allowance exists.
HM Revenue & Customs’ (HMRC) guidance
HMRC state that a business can provide trivial benefits to an officer of a `close’ company. An `officer’ means a director or secretary. The term `close’ company means companies that have five or fewer shareholders. In real life, most contractor companies will have nowhere near five shareholders. Therefore, most will qualify for this tax-deductible allowance.
There is some further official guidance from HMRC. This guidance states that if the total provided does not exceed £300 over the tax year, it is tax-deductible. Also, you need to retain invoices or receipts for all Trivial Benefits that you claim during the tax year.
To be exempt from tax and NI, the Trivial Benefit will need to meet the following four conditions:
The cost of the trivial benefit is no more than £50 in total inclusive of VAT
It is not cash or a cash voucher that you can exchange for cash
The payment is not a reward for any work or performance
The amount is not part of any work type of duty
There is nothing new about an employer that provides its staff with benefits such as a gift at Christmas. Employers sometimes provide a free meal to celebrate a member of the staff’s birthday or another special event. Some employers also provide free tea and coffee for their employees while they are at work.
What to bear in mind
Under the rules, you can afford to spend a bit more on yourself and your staff without having to pay tax on this.
Gift vouchers up to £50 are ok to claim, providing that you cannot exchange the voucher for cash.
Please note, you need to make sure that you do not go over the limit. If you do go over this, even by a small amount, the total cost will be taxable through the employer’s payroll.
It is also crucial to note that trivial benefits are not the same as benefits in kind (BIK). BIK applies when your employer provides you with some form of benefit. The BIK could be a company car, motorbike or van. It could also be medical insurance, dental cover, a director’s loan, or other benefits.
Please also remember, if you would like to make a payment of a trivial benefit, it is not in place of any work payment.
What’s more, the £300 limit mentioned above applies to an officer of a `close’ company. Where a business provides a benefit to the director’s family member or household, we need to treat this as being provided to the officeholder. This is then part of their annual exemption.
You should adhere to the limits and exemptions. If you do, the employer will receive a Corporation Tax (CT) deduction on the cost of the Trivial Benefits.
How you can claim for these as a UK contractor
If you work as a contractor through your own UK business, this is one allowance that you should claim. You can claim for this each year as long as you follow the above guidelines. Please make sure that it is not cash or a cash voucher (a cash voucher is a voucher that you can exchange for cash).
Also, please make sure that it is not more than £50 each time. The annual allowance is £300 per director. Therefore, you can claim for the £50 up to six times a year, each year. The amount will save CT at 19%. You also receive the benefit of what items that you spend this on. Please also make sure that you obtain the receipts each time that your business pays for a Trivial Benefit.
Even now, three years on from the intro of this tax-free expense, many are not aware of it. It is not well known, and as a result, many business owners that can claim this do not do so. There is no definitive list that covers what your trivial benefit can cover. Therefore, as long as you bear in mind the exemptions above, it can be for any cost.
Therefore, if you are a contractor who runs your own UK company (with five or fewer shareholders), please think about claiming for this in the future.
When you are in business and are setting up for the first time or you have been running your company for quite some time you might think can I pay my spouse a salary through my company? If so, how much can I pay them as a salary? These are questions that pop up quite often from contractors, and the good news is you can, although you will need to take an overall look at your business to see if this something that you would like to do.
When you are running your own company, you may also be an employee in your business. As a contractor and the main income generator you may also be taking a director’s salary. What’s more, you may also decide to make your spouse an employee, too, and pay them a salary for any work that they do for you.
Depending on what your spouse earns, it may also be an idea to consider making use of the transfer of theMarriage Allowance.
What to consider
Is your spouse a higher rate taxpayer?
There is no benefit in paying your spouse a salary if they are already earning above the higher rates tax level (£50,270).
As a result, if your company did, it would save Corporation Tax (CT) at 19% on the salary cost. Your spouse, though, would pay PAYE tax on the salary at 40%.
Are they using up their tax allowance?
There is also no real benefit in paying your spouse a salary if they already earn enough to use up their allowance. The personal allowance is currently £12,570 in 2021/22.
Consequently, if your company did, it would save CT at 19% on the salary cost. Your spouse, however, would pay PAYE tax on the salary at 20%.
Do they have no other salary or have income less than £12,570 per annum?
In contrast, if your partner or spouse has no other salary or earns less than £12,570 per annum, you could pay them a salary and make some tax savings. Your company would save CT at 19% on the salary cost, and your spouse would receive the monthly net salary.
Employing your spouse and paying them a salary
Working and performing tasks for your company
Importantly, if you are going to pay your spouse a salary, they should also be doing some work for your company to justify this. Such tasks could be administration type tasks and could include:
answering the phone;
opening company mail;
dealing with company e-mails;
updating the company’s accounting system;
If your spouse is not doing any work, HMRC may challenge the salary.
For your company to be able to pay a salary to you and perhaps your spouse, it will need to be running a PAYE scheme. HMRC will set this up, and your accountant will usually administer this for you. You can find out more about this on the HMRC website.
National Living Wage (NLW) and National Minimum Wage (NMW)
Please note, you will need to pay at least the National Living Wage or National Minimum Wage if:
If your spouse is not a director; and
does not have a contract of employment.
This is £8.91 per hour (NLW) for over 23’s as of April 2021. NMW applies for 22 and under and for 21-22 the rate is £8.36, for 18-20 it is £6.56 and for 16-17 it is £4.62. For Apprentices, the rate is £4.30.
Apprentices are entitled to the minimum wage for their age if they are both aged 19 or over and have completed the first year of their apprenticeship.
Finally, if you decide to pay your wife or partner a salary, you may wonder how much.
As part of this you will need to consider here what is the value of the work that they carry out for your business. What’s more, £797 per month (£9,564 per annum) is the current minimum level that counts as a qualifying year for UK state pension purposes.
Many contractors choose to pay their spouse a salary through their company. In turn, the spouse will carry out certain tasks for the company, usually administration type tasks.
Contractor salary -what level of should I take? Here is a subject that is one of the most common things a person asks who is a contractor running their own company. You could take a low salary, a middle-level salary, or even a high-level salary. The choice is yours to decide on based on what you would like to do.
If you are married or have a partner you might also consider paying your spouse a salary. In addition, depending on what your spouse earns, it may also be an idea to consider making use of the transfer of theMarriage Allowance.
What to consider
Things to think about when you decide on your salary
When you look at my salary as a contractor, you will need to look at various factors. These would include being tax efficient and paying enough to justify your pension payments. It may even include paying a higher salary should you have your reasons for doing so.
What’s more, there are several things to think about here. Each contractor will have their personal preference when it comes to what they decide on as their level of salary.
If you take a salary above the NI threshold and take the rest of your earnings as dividends, this is tax-efficient for you.
In 2021/22, the tax-free personal allowance is £12,570. You can, however, earn as little as £9,564 per annum, and this will count as a year that qualifies for state pension purposes.
£9,564 per annum will equate to £797 per month, and as such, you may choose to pay yourself a salary at this level.
Indeed, this does assume, of course, that you will fall outside of the IR35 rules.
You could take a higher level of contractor salary, but a salary above £9,564 would incur:
Employees NI of 12%; and
Employer’s NI of 13.8%
A salary above £12,570 would also incur income tax at 20%
What to consider
When you make pension payments, the general advice is your salary should be at least as much as your pension payments. Your pension adviser can let you know here. They can advise with regards to what salary level you need to be able to make your pension payments.
If you have worked at several different employers in the past and have various pension schemes, something that you may be interested in is pension consolidation.
Many contractors choose the most tax efficient option by taking a contractor salary just above the NI threshold. They will then take the rest of their earnings as dividends.
As a business owner, can I claim for entertaining costs as a business expense? For instance, when you are out and about entertaining clients that are related to your work? Well, there may be times when you are running your own company that you would like to drum up some new business with former, current, or potential new clients. Indeed, this can, in itself, be an excellent way to generate new work for your business. On these occasions, you may not know what you can claim from your company. My article will go over this and explain how the rules work and what you might like to think about here.
General business meals for you whilst you go about your work have different rules.
There are also separate rules for business gifts that you should consider if you are thinking about making a business gift.
The types of entertainment
There are two different types of entertaining costs when you meet business contacts. These could be either formal or informal, and they will depend on who you are meeting and the type of occasion. The two types of costs that you may incur as a result of your work could include:
The `business entertainment’ of clients. This type of cost could be you going out to discuss a certain business project or you to form or maintain a business connection. It might also include you meeting someone to discuss some potential work that one of your clients may hire you.
The ‘non-business entertainment’ of clients. This type of cost may occur when you meet a business contact for social reasons. Such a meeting could be a day out at the races or to attend a sports event. It could also be some other social day out.
Please note, when you consider if you can claim for entertaining costs, these costs are not Corporation Tax (CT) deductible. They are though business costs, and therefore the `benefit’ of these are not taxed on form P11D.
Although entertaining costs are not a CT deductible expense, they are an actual business expense. What’s more, it is more tax-efficient for your business to pay for these rather than you paying for them yourself. The reason for this is because your business will pay for these out of its pre-tax income. Compare this to you paying for these on a personal level -when you do this, you will pay for them out of your post-tax income.
What’s more, for each expense that you claim for, you will need to justify that it relates to your business. Therefore, if you hire a private plane or luxury yacht for the day, this may be hard to justify for drumming up some new business. In contrast, meals and drinks are a much simpler cost to justify.
Can I reclaim the VAT on entertaining costs?
Unfortunately, you are not able to reclaim the VAT on entertaining costs.
The exception to this rule is if you are holding an `annual event’ (see below) for your employees. You can reclaim the VAT on this cost if it fits in with the guidelines for claiming for an `annual event.’
If you hold an event for staff and non-staff, you are only able to reclaim the VAT element that relates to your employee’s costs.
Please note, you can claim for one entertainment type expense each year without the need to consult HMRC guidelines. This one expense is the annual Christmas party, which is now known as the `annual event’.
The allowed amount is £150 per company official and employee. Over a tax year, the annual event can also be several events.
Providing that the amounts paid through the tax year do not exceed the limit of £150 per person, they are CT deductible.
When you take a look at claiming for entertaining costs, it is worth bearing in mind that they can be handy to generate new business leads. They can also help you land potential future work. As I mention above, entertaining costs are not directly tax-deductible. However, your business should pay for these costs as opposed to you paying for them on a personal level out of your already taxed personal income. Being aware of this is one area that you may fail to observe if you are not sure how it works.
As a final thought, please keep a note of any entertainment costs when you incur these in the future.
Relevant Life Insurance policies provide life cover to the dependants of the policyholder, with funds paid via a discretionary trust. When you look for a Relevant Life cover quote, the premiums are paid for by the contractor’s company, rather than the employee. Therefore, this saves tax for you as the contractor.
You can take out a policy to protect you (the director). What’s more, you can also extend cover to your staff, and this may include your spouse. It is key that you are aware that this is on the basis you receive a salary from your company.
Three other policies that are specifically for contractors and are worth considering are:
Now, back to Relevant Life Insurance. Whether you are a business owner or a contractor, a Relevant Life policy offers very tax-efficient life insurance.
How much can you save with Relevant Life Insurance?
Let us now see how the cost of your contractor life insurance policy shifts when you obtain a Relevant Life cover quote. It moves from your pocket to your company expenses and the taxman.
For example –
Let us assume that you own your own company. You pay £100 a month and choose to pay for Contractor Life Insurance out of your pocket. It will cost your business more than it should. To begin with, if you are a 40% taxpayer, you need to consider you have already paid tax on the £100 in the form of income tax and employer and employee NI contributions. In fact, after 19% Corporation Tax (CT) relief, the net cost to your business works out at £158.93 per month.
Instead, by having a Relevant Life Insurance policy for your contractor life insurance, you do not pay any NI contributions or income tax on the premiums. However, you still receive a 19% CT relief. In turn, this makes the net cost only £81 per month.
That is a huge saving of £77.93 a month. This saving equates to £935.16 over the year.
There are great savings if you obtain a Relevant Life cover quote and pay through your own company
Not only does a Relevant Life Insurance policy offer great savings and special advantages to directors of small businesses and contractors looking for contractor life insurance cover, but it makes sure that your family is protected when you are no longer around.
While the life cover is personal to you, the policy counts as a genuine business expense. Therefore, it is tax-deductible. Let us now learn more about a Relevant Life Policy’s benefits:
You will immediately save tax by the business paying the contractor life insurance cover premium.
HMRC will not treat it as a benefit in kind; you will not need to report the premium as a P11D benefit.
Premiums are not subject to NI payments for the employer or employee.
Your business can claim CT Tax Relief on the premiums.
The benefit is payable tax-free.
The benefit does not count towards your lifetime allowance for pension purposes.
Relevant Life Insurance ought to be a consideration if you are a contractor and are looking for contractor life insurance. There are great savings if you pay for this through your company.
Therefore, if you would like to request a relevant life cover quote on tax efficient life insurance please make an enquiry with Broadbench. You can book yourself an appointment with one of their expert Contractor protection advisers. Please note, the link above has currently expired and a new one will be replacing this very shortly.
Taking the right steps before the end of the tax year can provide a financial boost for you and your business.
You may also have pension schemes in place from former employments and if you would like to consolidate these there are steps to consider.
If you are a director of your own company, what is the best way for you to take profits from the business for your benefit? The answer here will vary, and it depends on your tax position and your business. Usually, though, it will come down to finding a tax-efficient blend of income. When you decide on this, it will be in the form of salary, bonuses, and dividends.
When you decide on the level of salary from your business, you will need to think about various factors. These will include the current Tax and NI thresholds. It is often a good idea to keep your salary just above the threshold for NI. This level of pay is enough to qualify for the State Pension, while this also keeps you within a minimum tax band. This threshold stands at £9,564 for the current 2021/22 tax year.
On the other hand, your Personal Allowance will cover a salary of up to £12,570. This level of salary will be free of Income Tax if you have the box standard personal allowance and no adjustments in your tax code. There will, though, be a small amount of NI that will be due.
When we are thinking about a contractor pension scheme, historically, directors of profitable companies have preferred to receive a larger portion of their pay in the form of a dividend. They do so because it can help to reduce their tax bills. The annual tax-free dividend allowance was previously £5,000, but this came down to £2,000 on 6 April 2018. Therefore, dividends are now a slightly less attractive option for directors than was the case in prior tax years.
Even so, dividend payments will often be a more tax-efficient choice when you compare this to paying a salary. Dividends are not subject to NI. They also attract lower rates of Income Tax. Any dividend income above the £2,000 threshold and within the basic rate band, attracts tax at 7.5%. Dividends falling within the higher rate band or the additional rate band are taxable at 32.5% and 38.1%, respectively.
Using the £2,000 dividend allowance by 5 April may make good sense. Beyond that limit, how much should you choose to pay yourself in dividends? Your decision will depend on weighing up the relative tax bill.
Aside from salary and dividend payments, there are some other tax-efficient options. Therefore, this is well worth taking a look into these. For instance, if you can look past immediate income needs, it may be a good idea to pay some of your business profits into a contractor pension scheme. If you are a contractor you could set up a contractor pension scheme.
Many business owners overlook the fact that they can make a pension payment from their business for their benefit. What’s more, HMRC treats an employer pension payment as an allowable business expense. Therefore, you can set payments into your contractor pension scheme off against the business’ Corporation Tax (CT) bill.
By moving the cash into your pension, you can reduce the profits of the company. When you do this, it can, in turn, lower or eliminate the liability to CT.
If your company paid £10,000 into a contractor pension scheme, it would save CT at 19%, which is a saving of £1,900.
Please be aware that pension payments into a contractor pension scheme must abide by the rules for allowable deductions. You can find more info on the HMRC website.
Depending on your financial position, when you pay into a contractor pension scheme from the business, this may or may not be more beneficial to you. Indeed, this will come when you compare it to paying into a personal pension payment. These can attract personal tax relief at your highest marginal rate of tax. Your financial adviser will be able to help you decide which method is more tax-efficient.
In both cases, you can draw the money in a pension flexibly from the age of 55.
If you have passed your 55th birthday, you will be able to take the whole fund back and use the cash as you wish. A quarter of this will be tax-free, while the rest will be subject to Income Tax.
You can add up to £40,000 to your contractor pension scheme this tax year using pre-tax profits from your business. You may not have made pension payments this tax year or in the previous three. If this is so, you could use the carry forward rules to add notably more to your pot.
Please note your company needs to pay the employer pension payments before its financial year-end. If you do this, your payments will qualify for the deduction during that accounting year or period.
The value of an investment will link directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation and reliefs from taxation can change at any time. They are also dependent on individual circumstances.
As a final note. You may like to talk to a financial expert about the prospect of starting up a contractor pension scheme. What’s more, you may like to know how this could be of benefit to you and your business. Therefore, if you would like to know more about a pension for contractors, please feel free to contact Joe Willcox. You can reach him by e-mail at [email protected]