The UK government currently collects more than 45% of its total annual revenues from income tax and National Insurance Contributions. Compared with this, the impact of corporation tax on the government’s coffers is tiny, at only 8%. Furthermore, as corporation tax rates have decreased in recent years in order to encourage business investment in the UK, income tax and National Insurance rates for both employees and employers have increased. For a basic rate taxpayer, every £1 of post tax income costs his employer £1.67. For an employee earning more than £150,000 and paying tax at the additional rate of 45%, every £1 of net income costs the employer £2.15!
For owner managed businesses, opportunities exist to reduce the tax burden in various relatively simple ways, such as deferring income until it can be converted into capital through a sale process or by extracting profits by way of dividend instead of salary and bonus. For employees, the opportunities to reduce taxes are more limited, but we can advise on the following areas where tax efficiencies may be achieved:
- Use of salary sacrifice or salary exchange to swap taxable income for non taxable benefits such as pension payments, childcare vouchers or bicycles;
- Company car provision- cars which produce zero or very low emissions can be a very tax efficient method of remunerating staff. The benefit in kind rate for zero emission (electric) cars is currently 0%, meaning that there is no tax charge on an employee who has such a car. For an employee choosing a car which emits less than 94g CO2/km, the benefit in kind is just 10% of the car’s list price. A basic rate taxpayer receiving a car costing £15,000 and producing less than 94g CO2 would pay only £300 tax per year on that car. By way of contrast, if he were to be paid enough to lease that car over three years, handing it back at the end of the period, his tax and National Insurance liability would be approximately £1,700 per year;
- Use of non taxable travel and subsistence payments for site based employees; and
- Use of Limited Liability Partnerships (LLPs). LLPs are a familiar vehicle in the legal and accounting professions, but there are no reasons why they cannot be used elsewhere. The key advantage is that partners are not subject to employers’ National Insurance Contributions at 13.8% on their drawings whereas employers must pay that in respect of their employees. Commercial benefits can also be generated through the use of partnerships, particularly if senior staff feel more motivated by the resulting sense of ownership.