Iain Rankin looks at a question sometimes asked by company owners.
Many employers offer salary sacrifice arrangements, where an employee salary is reduced in exchange for a benefit. Generally, employees are given a range of different benefit options to pick. These arrangements are a great means of providing incentives to staff and/or keeping them on board for the long run, however the employer also benefits from the NIC and tax savings.
In 2017, changes to the ‘salary sacrifice’ rules came into effect, meaning those remuneration structures have had to be re-visited. If this benefit is provided for directors of a close company, different rules apply. Therefore, the provision of such benefits must be carefully thought out if they are to be tax-efficient.
Deposits and mortgage repayments
One benefit option which is often overlooked is to subsidise a director’s mortgage payments, or loan a deposit for a property. There are a number of ways by which an employer can pay their employee’s mortgage payments but it should be noted that if the employer pays the mortgage payment directly, a benefit in kind arises. This means that when the company makes the payments, these payments are treated as though the employee is receiving taxable income. The key difference is that while the employee incurs income tax, in this case it is the employer who incurs the Class 1A National Insurance contributions (NICs) at 13.8%.
Usually the employee would suffer both income tax and NICs before receiving their salary payment and subsequently making their mortgage repayments. However, in this scenario, the employee pays only income tax on the total amount of the repayments paid by the employer within the tax year. As a limited company, the employer is also able to claim corporation tax relief on the Class 1A NICs payments.
Furthermore, the company may subsidise a deposit for a property via an interest-free loan. For any loans under £10,000 no benefit in kind arises but any larger loans to company directors must be fully repaid within 9-months of the company’s year-end. Otherwise, HMRC have a tax charge of 32.5% on any such loans. However, this additional charge can be recouped by the company upon repayment of the loan. But for directors who are higher-rate (or additional-rate) taxpayers, the 32.5% tax charge on an outstanding loan may still be favourable.
If a loan is provided to a director, the appropriate documents must be drawn up, recording the event and laying out the terms of the loan.
Lastly, provided that certain circumstances are met, a company can claim a tax-free “Relocation Allowance” of up to £8,000 on permitted expenses. If costs are in excess of £8,000, the relief can be deducted from the total; tax is paid only on the excess. In order to take advantage of this allowance, it is crucial that the director or employee meets certain criteria.
Firstly, a change of residence must arise due to either starting a new job (that is a significant distance away), a change of duties involved in employment, or a change of location where those duties are performed; for example, a significantly longer commute.
Secondly your former residence must be an unreasonable daily travelling distance from the new workplace, and conversely the new residence must also be a reasonable distance from same. HMRC do not explicitly define a reasonable distance, but it is advised to make a reasonable judgement.
Thirdly, the allowance must be claimed by the end of tax year following the year in which the expenses arise. Any later and you cannot claim the allowance; all payments of expenses are then treated as a benefit in kind. For example, expenses arising in the 19/20 tax year must be provided to you by the company before April 5th 2021.
Lastly, genuine expenses and benefits must be incurred - the company cannot simply provide an £8,000 allowance. The set of valid expenses is limited, and must be either bridging loans, purchase of a new residence, removal expenses, domestic goods for a new property, or travel & subsistence incurred in finding a new property. Expenses relating to the sale of a former property are also valid.
While your limited company can undoubtedly provide assistance, whether you are relocating or purchasing a property, care must always be taken to ensure that your arrangements are fully HMRC compliant and tax-efficient. Each case is different and negligent planning could land you in trouble, so it is always advised that you consult with a tax professional.