Question:

“I am a limited company contractor and am considering taking out private medical insurance for me and my family. Is this an expense that is best to put through my company or not? Can you let me know the tax implications of both methods. I take out salary and dividends right up to the higher tax band each tax year and I am the sole shareholder and director”.

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Answer:

This answer is based on 2015 tax rates

In answering your question we are going to assume that the private medical insurance cost via either method is £1,000 – if the prices differ the comparison is more complicated.

If you were to have this paid for by the company there would be a number of tax implications. Firstly, this would be classed as a benefit in kind, as such; a P11d form would need to be prepared for you with possible admin costs and Class 1a National Insurance at 13.8% (£138) would be payable by the company by 19th July following the end of the tax year in question.  The company would however be able to claim corporation tax relief for the full amount of the medical insurance and the national insurance at 20% (£1,138 @ 20% = £227.60)

The P11d form prepared above will have to be declared on your personal tax return and will attract personal tax at the marginal rate between your salary and dividends. Assuming your affairs are as tax-efficient as possible this would be 20% (£200) and would knock a further £1,000 of gross dividends into the higher rate tax bracket, taxed at 22.5% attracting a further £225 personal tax charge. This would be a total personal tax increase of £425 payable 31st January following the end of the tax year to which it relates.

If you were to pay this personally and fund this via extra dividends from the company there would be no corporation tax or national insurance issues so it would be much simpler to deal with. You would however be taxed personally on dividends at the higher rate as you have no basic rate band available. In this instance the extra £1,000 cash dividend would be shown as a grossed up £1,111 on your personal tax return and attract a tax charge at 22.5% (£249.98).

See below table which compares the two options:

medical costs ltd

As you can see in your circumstances it is more tax efficient to pay for the medical insurance personally and it is also simpler as it avoids the need of preparing P11d returns.