How to avoid P11d benefits!
How to avoid tax on benefits by “making good”
In 2021/22 your company provided you with benefits in kind on which you’ve paid tax through PAYE. It’s possible to reverse the tax and NI consequences by making good the benefit. What’s involved?
Making good benefits in kind
There are many reasons why you might want to make good a benefit in kind . As a director shareholder the most likely reason is to improve tax efficiency for you and your company. We’ll look at this aspect in another article but here we’ll consider the mechanics involved in making good.
What is making good?
Simply put, making good a benefit reduces the tax and Class 1A payable. A making-good payment reduces the taxable amount of the benefit pound-for-pound. It requires the recipient to pay the benefit provider (usually their employer), and to be effective the making good must be a payment of money or have money’s worth. Providing extra services for free to your employer which may have value won’t count.
Tip. If you’re entitled to pay, e.g. salary, for extra services you provide, giving all or part of it up is “money’s worth” and so can be a way of making good. The amount made good is the net of tax and NI amount, not the gross pay.
Methods of payment
The following methods can be used to make good:
a direct payment to the employer
a deduction from salary (see the Tip above)
a debit to a director’s loan account (DLA).
The last method has advantages over the others.
Tip. Creating or increasing your debt to your employer, such as debiting a DLA requires no immediate cash payment. Actual payment can be deferred indefinitely.
Example. Lee is the sole director shareholder of Acom Ltd. Its most recent financial year ended on 31 March 2022. In 2021/22 it provided him with benefits, the taxable value of which is £4,000. He decides to make good the whole benefit but can’t afford to make the payment needed by the deadline (see below). Instead he asked his bookkeeper to debit his DLA (which currently has a nil balance) with Acom. This cancels the benefit and gives him until 31 December 2023 to balance his loan account before the debit potentially leads to other tax charges.
Timing
Making good must be done no later than 6 July following the end of the tax year to which the benefit in kind relates, e.g. for 2021/22 by 6 July 2022. However, where the benefit is a cheap-rate or interest-free loan or credit, tax legislation doesn’t mention a specific date for making good, but in practice it’s twelve months after the 31 January that follows the end of the tax year. For Class 1A NI purposes the making-good deadline is the 6 July that follows the end of the tax year for which you’re making good.
Further condition
For some benefits making good counts only if the employer providing the benefits requires it. The obligation to make good must exist before the end of the tax year for which you want to make good. The most common benefits for which this extra condition applies are: company cars and vans, fuel for private journeys, and interest on cheap loans.
To make good a benefit in kind for tax and Class 1A NI purposes you must make a payment to the provider (usually your employer) by 6 July following the end of the tax year. For interest-free or cheap-rate loans or credit, the deadline for tax (but not NI) is later. A debit to your loan account by the deadline counts as a making good payment.