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Benefits vs dividends

Benefits vs dividends: what’s the best option?

Benefits vs Dividends

Business going well? Unsure how to reap the rewards of your hard work? Today we’re taking you through the most tax-efficient methods of extracting cash from your business.

As a business owner or director, it’s understandable that you want to reap the financial rewards of your venture’s success – and do so in the most tax effective manner. However, before you put your hand in the pot, it’s essential to consider both stakeholders and shareholders in the business. There’s little point in remuneration if extracting the cash is going to impact the business’s cash flow or affect shareholder profits. Benefits vs dividends – what’s the best option for you?

Dividends

Taking dividends from a business is by far the most common approach to extracting profit in a tax-efficient manner. Directors who are also shareholders can award themselves a salary in line with their National Insurance (NI) earnings limit, or whichever alternative level suits them, while supplementing their income through dividends. For the most part, dividends offer the most tax friendly approach to benefiting from corporate success, but there are other options which are worth investigation.

Benefits in Kind

Benefits in Kind, commonly abbreviated as BiKs, come in two forms. BiKs are either liable to income tax and NI or exempt from both. While some taxable BiKs remain a far more tax-efficient method of providing an income over taking a salary of equal value, for the most part, dividends remain much more tax-efficient than BiKs which are liable to tax. BiKs become an interesting option, however, when they’re tax and NI exempt.

BiKs: The pros and cons

Unlike dividends, which can be extracted as cash, BiKs are essentially a cash alternative – replacing costs you would otherwise incur out of your taxed salary. And unfortunately, in order to take full advantage of their value, they’re only tax-effective when applied to tax and NI exempt items. Limitations aside, tax exempt BiKs can still offer a highly attractive option, saving you and your business cash in a number of areas. Some of the most common tax exempt BiKs include free business lunches, pension contributions, emission-free vehicles and childcare to name just a few.

BiKs vs Dividends

So which presents the most tax-efficient option?

When it comes to extracting profits from your business, the advantages of taking a tax and NI free BiK can be worth considering over dividends – providing a more tax-efficient option in certain circumstances, maximising your earnings. In addition, unlike dividends which can only be paid when your business is in profit, BiKs can be taken regardless of your business’s financial performance. This makes them an ideal tax-efficient method of extracting value from fledgling businesses yet to turn a profit.

If you’re looking to extract profit from your venture and need some guidance from the professionals, look no further than Intouch Accounting. As expert contractor accountants, we can provide comprehensive advice on the most tax-efficient methods of reaping the rewards of your business. Contact us to find out more.

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.