For years, the most tax-efficient way for a sole director or owner to withdraw money from a company has been through a combination of salary (up to the employer’s secondary NIC threshold) and dividends. However, changes to tax thresholds and NIC limits since July 2022 have introduced another option to consider; benefits in kind (BIK).
Here’s a breakdown of when BIK might be the more tax-efficient choice.
Salary and Dividends: The Traditional Approach
For the 2024/25 tax year, the following thresholds and rules apply:
- The employee primary NIC threshold and the personal allowance are both set at £12,570.
- The employer secondary NIC threshold is lower, at £9,100.
If the company doesn’t qualify for the Employment Allowance (e.g., it has a sole director-employee), NIC applies on salary above £9,100. However, paying a salary up to £12,570 is still optimal because the corporation tax deduction outweighs the NIC liability by £508.36 per employee (assuming a 25% corporation tax rate).
What’s the Most Tax-Efficient Combination for 2024/25?
- Up to £134,000: Salary of £12,570 with the balance taken as dividends.
- Between £134,000 and £411,000: Salary of £9,100 with the balance taken as dividends.
- Over £411,000: Take the entire amount as salary under payroll conditions.
Tax rates and thresholds are set to change in 2025/26, so these calculations will need to be adjusted.
When Are Benefits in Kind (BIK) More Tax Efficient?
While dividends are typically more efficient than BIK, there are cases where BIK becomes the smarter choice.
When Does BIK Beat Dividends?
- Tax-Free or Low-Tax Benefits: BIKs that are exempt from tax and NIC or have low taxable values (e.g., zero-emission company cars).
- Tax Deductible for the Company: The company can claim a tax deduction for the benefit, even if the director pays little or no tax on it.
- Loss-Making Companies: BIK can still be provided, even if the company is not generating profits.
Examples of Tax-Efficient Benefits
- Company Cars
Providing a company car can be more tax efficient than paying additional salary—particularly for low-emission vehicles such as plug-in hybrids or electric cars.
- BIK Charges: The BIK rate for electric cars is significantly lower than for high-emission vehicles.
- Additional Costs Included: Maintenance, servicing, insurance, and road tax are tax-deductible for the company but don’t increase the BIK charge for the director.
- Tax-Free Extras: HMRC allows extras up to £100 without adding to the BIK charge.
- Pension Contributions
Employer contributions to a pension scheme are a highly tax-efficient benefit:
- No Income Tax or NIC: Contributions are exempt for the employee.
- Corporation Tax Relief: Contributions are deductible from the company’s profits, reducing the corporation tax bill.
- Mobile Phones
A mobile phone contract provided by the company can be completely tax and NIC-free, as long as:
- The phone is owned by the company.
- The contract is in the company’s name.
The company can claim corporation tax relief on the cost without any tax implications for the director.
Practical Considerations
BIK is most effective when:
- The director doesn’t need additional cash income.
- The benefit would otherwise be a personal expense.
Need Help Optimising Your Tax Strategy?
Choosing between salary, dividends, and benefits in kind isn’t always straightforward. At Jon Davies Accountants, we’ll help you calculate the most tax-efficient way to withdraw profits from your company.
Let us maximise your tax savings so you can focus on growing your business!
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