Dear Contractor Doctor,
I’m a corporate turnaround specialist and have just moved to the UK to start work on my first interim contract with a financial services client.
I am considering taking out private healthcare insurance, but I am struggling to work out which is more cost and tax efficient: paying the premiums through my company or paying for them personally. I might get better deals buying through a company, but if the company pays, I then have to pay extra tax in the form of benefit in kind (BIK) tax charges.
Is it worth paying benefit in kind tax for this and other benefits?
Thanks
Josef
Contractor Doctor says:
“Each contractor’s financial situation is not only unique, but will also change over time,” notes James Abbott, owner and head of tax at contractor accountant Abbott Moore LLP.
“That means when considering whether to pay for benefits such as private healthcare, living accommodation or gym membership via their company or personally, contractors will need to run some numbers and calculate the options that leave them better off.”
He adds that it is also important for contractors to ensure they are comparing like with like. This is because services providers such as private health insurers may offer more attractive packages to ‘corporate buyers’, or vice versa.
What is ‘benefit in kind’?
Abbott continues: “If an employee, such as a limited company contractor or umbrella company contractor, receives a non-cash benefit, such as private medical insurance or a company car, HMRC’s rules say that the contractor must pay income tax on the value of that benefit. In addition, the contractor’s limited or umbrella company must pay employer’s National Insurance Contributions (NICs) on the benefit.”
HMRC has various rules and tables that enable contractors to calculate the ‘cash’ value of the benefit in kind. A contractor is then charged income tax on that cash value at the contractor’s marginal rate, ie the highest rate of tax they pay, which could be 20%, 40% or 50%.
“This means that limited company contractors who are basic rate taxpayers and who would otherwise pay no additional income tax would incur an income tax charge on a benefit in kind. They would have to pay this personally after completing their self-assessment tax return.”
Example benefit in kind calculation for private healthcare
Abbott offers a real-life example of a higher rate taxpaying contractor who was considering whether to pay for private healthcare through their company or personally. He also includes the calculations for a basic rate taxpayer in the table below.
The healthcare insurance provider quoted the contractor £87 per month if the company pays and £80 if the contractor pays personally.
| Higher rate (£) | Basic rate (£) | |||
| If company pays | ||||
| Cost of benefit paid by company | 87.00 | 87.00 | ||
| Class 1A (13.8%) | 12.01 | 12.01 | ||
| Tax on benefit by individual | 87 x 40% | 34.80 | 17.40 | 20% |
| Total cost | 133.81 | 116.41 | ||
| If individual pays | ||||
| Profits to be generated (ie total cost) in company | 133.33 | 100.00 | ||
| Corporation tax | 20% | (26.67) | (20.00) | |
| Profits after corporation tax | 106.67 | 80.00 | ||
| Dividend | 106.67 | 80.00 | ||
| Personal tax on the dividend | (26.67) | - | ||
| Giving you the money to buy it personally | 80.00 | 80.00 | ||
| Conclusion | ||||
| If you pay personally the total cost is | 133.33 | 100.00 | ||
| If the company pays, the pay cost is | 133.81 | 116.41 |
Abbott says: “When calculating the cost of the company paying for healthcare, £87 is the premium, £12.01 is the cost of the employer’s NICs (13.8% x £87), and the income tax paid by the contractor is £34.80 in the higher rate taxpayer example or £17.40 in the basic rate taxpayer example.
“The total cost to the contractor, which is the cost to the company paying the premium and NICs, and the cost to the contractor paying the income tax, is £133.81 for a higher rate taxpayer and £116.41 for a basic rate taxpayer, as shown in the table above.
“To calculate the total cost if the contractor pays personally, ie net of tax, you have to work out what level of gross earnings would result in the £80 the contractor requires to pay for the premium. So, for a higher rate taxpayer to earn £80, they must generate £133.33 profit, from which you subtract £26.67 corporation tax (20% of £133.33) and £26.67 income tax at the higher rate. A basic rate taxpayer needs to generate only £100 gross profit to receive £80 net.
If an employee, such as a limited company contractor or umbrella company contractor, receives a non-cash benefit, such as private medical insurance or a company car, HMRC's rules say that the contractor must pay income tax on the value of that benefit
James Abbott, Abbott Moore LLP
“When you look at the numbers at the bottom of the table, you can see that there’s virtually nothing in it for the higher rate taxpayer, but the basic rate taxpayer is better off financially paying the premium personally.”
Ensure comparisons are accurate
Abbott highlights that, in situations where there are only pennies between the two options, such as the higher rate taxpayer in the example above, contractors should drill down into the service on offer.
“Contractors will find that service providers will offer different services and terms and conditions to corporate customers compared to individual customers, even when they superficially look similar.
He concludes: “After completing the benefit in kind calculation and comparing the detail of the service on offer, contractors should be in a good position to decide whether it is worth paying the benefit in kind tax charge for some company benefits.”
Good luck with your contracting!
Contractor Doctor