Can making good benefits be tax efficient?

Making good

Individuals have until 5 July each year to make good a benefit in kind for the tax year that has just ended, i.e. to pay the company/employer an amount that will reduce or cancel the tax and NI liability on the benefit.

Where the benefit has been taxed through payrolling, the making-good deadline is 5 April.

If the person receiving the benefit is an employee of a company and doesn’t own shares in it, making good a benefit provided to them won’t be tax efficient. However, if they’re a major shareholder it’s worth considering.

Making good factors

As a shareholder in a company the tax and NI consequences of making good are wide ranging. They affect the company’s corporation tax and NI liabilities as well as the shareholder’s tax and net income. How the taxable benefit is calculated also plays a part.

Cost and tax analysis

The basic type of benefit in kind is one where the amount the shareholder is taxed on as the recipient is equal to the cost to the company of providing it. Working out the tax efficiency of making good in this situation is the starting point for all types of benefit.

Example. Jim own 100% of the shares in Acom Ltd. In 2021/22 it contracted direct with a firm to decorate Jim’s home for £10,000. This counts as a taxable benefit for Jim. To keep things simple we’ve assumed Jim’s only other income for 2021/22 is from his company; a salary of £12,570 and dividends of £75,000. Jim’s net income from this is £77,909.

If Jim were to reimburse Acom the £10,000 and so make good the benefit it would reduce his net income to £67,909. To make up the loss Acom pays Jim an additional dividend that after tax leaves him with the extra £10,000 he needs for making good. It might seem odd but the extra dividend needed is just £8,148. This is because after making good Jim is no longer liable to tax on the benefit and the tax he pays on the dividend instead is less (see The next step ). The bottom line is while Jim’s net income is kept the same, Acom is better off by £1,070 because of the making good. This is mainly because it no longer has to pay Class 1A NI contributions. Jim can take the extra money in the company as and when he wants.

If the taxable amount of a benefit is calculated using special rules, e.g. for company cars and living accommodation, and it exceeds the annual cost of providing the benefit, the tax saving from making good will be reduced, eliminated or turn into a tax increase.

As a rule of thumb for company owner managers, it will be tax efficient overall to make good benefits in kind where the taxable amount is equal to or less than the cost of providing the benefit. However, we recommend crunching the numbers in all cases.