As a general rule, the cost of NI on benefits in kind (BiKs) is less than that on salary etc. But in some situations the opposite is true. When can you take advantage of this?
NI on benefits
NI used to be payable only on salary and payments treated as salary. Most BiKs therefore escaped NI altogether. That made them a key factor in remuneration planning. But all good things come to an end and a special class of NI – Class 1A – was created and now applies to most BiKs.
Employees escape scot-free
While the 13.8% rate of Class 1A contributions is the same as that for Class 1, which is payable on salary etc, only employers have to pay it. Employees get off scot-free.
Tip: Giving directors and employees BiKs instead of salary can reduce their NI bill and so increase the net value of the remuneration they receive.
Example: John is a director of Woodsy Ltd and in 2013/14, as part of his remuneration, it arranges and pays for medical insurance, gym and golf club fees at a cost of £5,000. This is a BiK for John and so there’s no tax saving compared to the position had he taken salary instead. But the BiK is liable to Class 1A and not Class 1, meaning John doesn’t pay NI on it. This can save him NI of up to £600
Trap: Some taxable BiKs are treated differently for NI purposes. They are liable to NI in the same way as salary.
As described in our example, the most NI-efficient way to provide BiKs is usually for the employer to arrange and pay for them. However, sometimes, particularly for directors, it can be more NI efficient for them to arrange for the BiKs themselves.
Not all benefits are NI equal
Had John arranged his own medical insurance etc. with Woodsy paying the bill, this would still count as a BiK for tax purposes, but for NI it would count as extra salary liable to Class 1 and not Class 1A. Therefore, Acom would be required to collect employees’ NI from Sam on the value of the bills paid. However, applying the Class 1 rules isn’t always bad.
Low salary directorships
For directors, whereas Class 1A applies on every pound of BiK, Class 1 only kicks in once your salary and BiKs which count as salary, reach the annual NI threshold. So if you draw little or no salary from one or more companies of which you’re a director, but take BiKs, you can reduce the NI if the contract with the supplier is in your name but your company pays the bill.
Example: Let’s assume John, from our earlier example, drew all his income from Woodsy as dividends except for the £5,000 for the medical insurance etc. This would count as a BiK on which it would pay Class 1A NI at 13.8%, i.e. £690. John would pay no NI. However, if Woodsy left John to contract for the BiKs but paid for them this would count as salary for NI purposes. But because the amount it pays (£5,000) is less than the threshold at which Class 1 NI is payable (£7,696 for 2013/14) no NI is due and Woodsy avoids the £690 NI bill.