Contractors’ Questions: Is it tax efficient to put private health insurance through your limited company?
Contractor’s Question: Is it more tax efficient to put private health insurance through your limited company than to pay for it independently?
Expert’s Answer: This is quite a common question from both new and existing contractors, who often take out private medical insurance in order to protect themselves since they no longer have the safety net of their employer's sick pay package. The answer to whether it's more tax efficient to pay through your company or personally will depend on your overall level of income, and as is often the case with tax it's rarely a simple answer!
A few examples will help to show this, and we're assuming that the value of the medical insurance is £1,200 per annum, we're in the 2013/14 tax year, the contractor has a normal tax code, and has no income outside of his or her limited company.
Say you take a salary of £12,000 and dividends of £26,505, then under normal circumstances you would not expect any personal tax liability. When you add in a benefit in kind of £1,200 however you would create an income tax liability of 20% of that, so £240. The company would then pay 13.8% Class 1a NI on the benefit resulting in a £166 company liability. This is somewhat offset by the saving in Corporation Tax, which will be 20% on the benefit in kind and NI, so £273. However, the benefit in kind is also seen as additional income for tax band purposes, which means £1,200 in dividends will be pushed into higher rates as dividends are always taxed as your top slice of your income. £1,200 in net higher rate dividends gives a further personal tax liability of £300. The overall result of paying through the company thus becomes a liability of £433.
If you had to pay the £1,200 personally instead then the tax would depend on whether or not you had to withdraw additional income to cover that cost. If your dividends are below higher rates and an additional dividend of £1,200 does not take you over, then you incur no extra tax liability. On the other hand if you already have income that pushes you into the higher rate tax band then an additional dividend on top will be higher rate, and result in a personal liability of £300.
From a cost point of view you're therefore better off paying through the company, as even though you'll be paying tax on the benefit it's still less money coming out of your pocket than paying the whole amount personally.
We would always advise talking it through with your accountant so you can get a personalised summary of the implications.
The expert was Clare Rickman, personal accountant at InTouch Accounting.
Editor's Note: For more information or for a quote on private health insurance for contractors from specialist provider WPA please visit our medical cover page.