Tax Planning for High-Earning Company Directors
A £45,000 petrol car in the top emissions band creates a taxable benefit of £16,650 a year. The same car, fully electric, creates a taxable benefit of £1,800. Nothing about the car's usefulness has changed. Only the tax label has.
That gap is the clearest example I know of why benefits in kind deserve attention. They are the perks that a company provides to a director, from a car on the driveway to private medical cover to a loan from the company account. They feel like part of the business. HMRC sees them as income.
I meet the problem every year. A director in Tunbridge Wells, Tonbridge or Sevenoaks tells me, "The company paid for it, so it's a business cost." Sometimes that is right. Often it is only half right. The company may get a deduction, but you may still owe tax on the value you received, and the company may owe National Insurance on top.
This guide explains what counts as a benefit, how the most common director benefits are taxed, what you must report and when, and how to plan around the rules. I have used the 2026–27 figures throughout, and I have worked through an example so you can see the numbers.
A benefit in kind is anything of value that a company provides to a director or employee because of their job, other than their salary or bonus. If you receive something that has a cash value and you can use it for private purposes, it may be a taxable benefit.
Directors of small companies are in a special position. Because you control the company, it is easy for private and business spending to blur. HMRC pays particular attention to this, and the rules treat directors of close companies, broadly those controlled by five or fewer shareholders, with extra care. Even the exemptions that apply to employees can have tighter limits for directors. The trivial benefits rule, for example, is capped at £300 a year for a director of a close company.
A taxable benefit creates two separate costs. You pay income tax on the value of the benefit, at your marginal rate. The company pays Class 1A National Insurance at 15% on the same value for 2026–27. The company also normally gets a Corporation Tax deduction for the cost of providing the benefit and for the Class 1A it pays.
Because the tax is calculated on a deemed value, not on the actual cost, the numbers can look strange. A car may cost the company £8,000 a year to run, but the benefit may be taxed on a figure of £16,650. The rules have their own logic, and it pays to understand them before you choose.
Not every perk is taxable. HMRC has a list of exemptions, and some of them are generous. One mobile phone contract in the company's name is exempt. A £6-a-week payment towards working from home needs no receipts. Trivial benefits costing £50 or less are exempt if the conditions are met, up to the £300 annual cap for directors of close companies. An annual staff party costing no more than £150 per head, open to all staff, is exempt. Mileage payments at or below the approved rates are not benefits either, which is why we often prefer them to company cars for directors with modest business mileage. Our guide to whether your limited company should buy a car explains that comparison.
For everything outside the exemptions, the starting assumption is that it is taxable.
If the company pays for something that is partly or wholly personal, it is a benefit. That includes the director's private bills, family holidays, personal shopping, home improvements and school fees. Such payments are sometimes put through the director's loan account instead, which has its own rules and its own tax, and I come to that below.
Most directors will meet four or five benefits repeatedly. Let's take the biggest ones in turn.
A company car is the benefit that most directors think of first, and it is also the one with the most complicated rules.
How the benefit is calculated. The taxable value is the car's list price, including most accessories, multiplied by a percentage that depends on its carbon dioxide emissions. You then pay income tax on that figure at your marginal rate. The company pays Class 1A National Insurance on it at 15%.
The electric advantage. For a zero-emission car, the percentage is 4% in 2026–27. It rises to 5% in 2027–28, 7% in 2028–29 and 9% in 2029–30. For a high-emission petrol or diesel car, the top rate in 2026–27 is 37%. On a £45,000 car, that is a benefit of £1,800 for the electric car and £16,650 for the high-emission one. A higher rate taxpayer pays £720 in income tax on the first and £6,660 on the second. The company's Class 1A bill is £270 on the first and £2,497.50 on the second.
The fuel benefit. If the company pays for fuel that you use privately in a petrol or diesel car, there is a separate charge. For 2026–27, it is calculated by applying the same percentage to a fixed figure of £29,200. At 37%, that is a further benefit of £10,804, which costs a higher rate taxpayer £4,321.60 in tax and the company £1,620.60 in Class 1A. Electricity used to charge an electric car does not create a fuel benefit.
Vans. A company van that you can use privately is taxed differently. For 2026–27 the flat charge is £4,170 a year, with a further £798 if the company pays for private fuel. That is far lower than the charge on most cars. But the definition of a van is strict, and double-cab pickups in particular need checking.
Reducing the charge. You can reduce a car benefit by paying the company for private use, or by making a capital contribution towards the cost of the car. Choosing a lower-emission car is the most effective step of all. And for directors who drive modest business miles, using a personal car and claiming 55p a mile for the first 10,000 business miles avoids the benefit altogether. Our guide to company cars covers the comparison, including the capital allowances and the first-year allowance for electric cars, which is currently due to end on 31 March 2027.
Private medical insurance is the second most common benefit, and it surprises many directors.
The rule. If the company pays for private medical insurance for you, the cost to the company is a taxable benefit. If the premium is £1,800, the benefit is £1,800. A higher rate taxpayer pays £720 in income tax, and the company pays £270 in Class 1A. It is still often worth having, but it is not free.
The exceptions. Some health-related items are exempt. An annual health screening or medical check-up arranged by the company is generally exempt. So is an eye test and the cost of glasses if you need them for screen work, and certain treatment to help you return to work after a period of sickness, up to a limit of £500. These exemptions have conditions, so check before you rely on them.
An alternative. Some directors prefer a health cash plan, which pays towards everyday costs. Whether it is taxable depends on how it is set up. Please ask before you sign up.
I remember a Sevenoaks director who set up a comprehensive family health policy through his company. The premiums were £4,200 a year. He thought of it as a business cost. When we looked at the numbers, it created a benefit of £4,200, tax of £1,680 for him as a higher rate taxpayer, and Class 1A of £630 for the company. He kept the policy, but he budgeted for it, which was the real point.
Loans from the company to a director are the most technical of the common benefits, and the most easily overlooked. They arise when the director takes money from the company that isn't salary, a dividend or a repayment of expenses, and the account is overdrawn.
The £10,000 rule. If the total of all loans from the company to you is £10,000 or less throughout the tax year, there is no benefit in kind. If the balance goes above £10,000 at any point, the exemption is lost, and a benefit arises on the full balance, not just the excess.
How the benefit is worked out. The benefit is the interest you would have paid at HMRC's official rate, less any interest you actually paid. The official rate has been 3.75% in recent years, but it is reviewed regularly and can change, so check the current figure before you calculate it. On an average loan of £25,000 at 3.75%, the benefit is £937.50. A higher rate taxpayer pays £375 in tax on it, and the company pays £140.63 in Class 1A.
Paying interest. If you pay the company interest at or above the official rate, there is no benefit. The interest must actually be paid, and the company has to account for it as income.
The separate charge on the company. This is a different tax, and it often applies at the same time. If a loan to a director is still outstanding nine months and one day after the company's year-end, the company pays tax under section 455 at 35.75% of the balance, for loans made on or after 6 April 2026. On a £25,000 loan, that is £8,937.50. It is refundable once the loan is repaid, but the refund is not instant. The benefit-in-kind tax, by contrast, is not refundable. Our guide to director's loan accounts explains the interaction in detail.
Several other items come up often. Personal expenses paid by the company, such as a family holiday or groceries on the company card, are taxable. Assets provided for private use, such as a laptop used mainly by your family, can create a benefit. Gym memberships, unless they fall within a narrow exemption, are taxable. Accommodation provided by the company, such as a flat, is taxable unless special conditions apply. Professional subscriptions and training related to your job may be exempt, but those for personal interests are not. When in doubt, ask.
Knowing what is taxable is only half the task. The other half is reporting it correctly and on time.
Each director or employee who receives taxable benefits that have not been put through payroll needs a form P11D. It lists each benefit and its value for the tax year, which runs from 6 April to 5 April. The company must send the form to HMRC and give a copy to the director.
The company also files a form P11D(b), which totals the Class 1A National Insurance due on all the benefits. You must file this even if every benefit has been put through payroll. The Class 1A is then paid by the company at 15% of the total value.
The forms for the tax year ending 5 April must reach HMRC by 6 July following the end of that tax year. The Class 1A National Insurance is due by 22 July if paid electronically, or 19 July if paid by cheque. There are penalties for late forms, which are charged per month and per group of employees, and interest on late payment. These deadlines don't move, so put them in your diary as soon as the tax year ends.
As an alternative to the P11D, a company can choose to "payroll" certain benefits. The value of the benefit is added to your pay each month through the payroll, and tax is collected through PAYE as you go. You still file the P11D(b). The company must register with HMRC before the start of the tax year in which it wants to payroll. Many small companies find the P11D simpler, but payrolling can smooth the cash flow of the tax.
A PAYE Settlement Agreement allows a company to pay the tax on certain minor or irregular benefits on your behalf, in one lump sum, instead of reporting each one on a P11D. It needs to be agreed with HMRC by 5 July after the end of the tax year it covers, and the payment is due by 22 October. It can be a useful tool for smaller benefits that are hard to value, but it is not free, because the company bears the tax.
As a director, you declare the benefits on your Self Assessment return, which is why your accountant needs the P11D. The tax on the benefits is collected through the return or by adjusting your tax code. If the benefit is missing from your return, HMRC will see the mismatch when the company's P11D arrives. Our guide to whether directors need a Self Assessment return explains the process.
Keep a record of everything you provide, with dates, costs and any contributions the director has paid. Keep copies of each P11D, the working papers and the proof of payment for at least six years.
Benefits in kind are not something to avoid at all costs. Many are worth having. The skill lies in choosing them with your eyes open.
Before you take a benefit, compare its after-tax cost with what you could have done with the same money. A £1,800 medical policy that costs you £720 in tax may be good value if you would have bought the cover anyway. A company car that costs more than mileage claims might not be.
The exemptions exist to be used. A single mobile phone contract, the £6-a-week home working payment, a staff party within the £150 limit, and trivial benefits within the £50 and £300 limits are all available at no tax cost. Many directors don't use them because nobody told them.
For a car, the emissions matter more than almost anything else. The difference between 4% and 37% is the difference between a modest bill and a heavy one.
If you have a director's loan above £10,000, charging interest at the official rate removes the benefit. You pay the interest, the company records it as income, and the net effect is often small. It can also help you manage the section 455 charge, though that is a separate matter.
The simplest way to avoid unwanted benefits is to keep personal spending personal. A separate business bank account makes this far easier. Our guide to separate bank accounts explains how.
Rates and rules change. The car percentages are rising each year, the official interest rate is reviewed, and the thresholds shift. A short review each year costs little.
Let me show you what the numbers look like for a typical director. A Tunbridge Wells director is a higher rate taxpayer. During 2026–27, the company provides three things.
A fully electric company car with a list price of £45,000. The benefit is 4% of £45,000, which is £1,800.
A private medical insurance policy costing the company £1,800. The benefit is £1,800.
An interest-free loan, averaging £25,000 for the year, with no interest paid. At an official rate of 3.75%, the benefit is £937.50.
The total benefits are £4,537.50. The director pays income tax at 40%, which is £1,815. The company pays Class 1A National Insurance at 15%, which is £680.63. The company also obtains a Corporation Tax deduction for the cost of providing the benefits and for the Class 1A.
Now consider what changes if the car had been a high-emission petrol model at the top rate of 37%, with the company also paying for private fuel. The car benefit rises from £1,800 to £16,650, and the fuel benefit adds £10,804. The total benefits jump to £30,191.50. The director's income tax bill rises to about £12,077, and the company's Class 1A to about £4,529. The same director, the same company, the same three perks, but a very different bill.
And if the £25,000 loan were still outstanding nine months and one day after the year-end, the company would owe a further £8,937.50 under section 455, which can be reclaimed when the loan is repaid.
The point isn't that the benefits are bad. It is that the cost is knowable in advance, which means you can choose.
Quick answer: A benefit in kind is anything of value that a company provides to a director because of their role, other than salary. Unless an exemption applies, the director pays income tax on the value, and the company pays Class 1A National Insurance at 15%. The main ones for directors are company cars, private medical insurance and loans from the company.
What this means for a company director: You should treat any personal use of company money or assets as potentially taxable. The company must report benefits on forms P11D and P11D(b) by 6 July, and pay Class 1A by 22 July. You declare them on your Self Assessment return. Choosing a lower-emission car, using the exemptions and charging interest on loans can reduce the cost significantly.
Example: A higher rate taxpayer receives an electric car with a £45,000 list price (benefit £1,800), private medical cover costing £1,800 and an interest-free average loan of £25,000 (benefit £937.50 at 3.75%). Total benefits are £4,537.50. The director pays £1,815 in income tax, and the company pays £680.63 in Class 1A.
Common mistakes: Assuming that a company-paid cost is not taxable. Forgetting that medical insurance is a benefit. Letting a director's loan go above £10,000 without interest. Missing the 6 July deadline. Not telling your accountant. Choosing a car without checking the emissions.
When should you speak to an accountant? Before you accept or provide any benefit, particularly a car, a loan or medical cover. Also when your director's loan account is overdrawn, when you receive a P11D deadline reminder, and at your year-end planning meeting.
The company paying is not the test. The question is whether you benefit personally. If you do, it is probably taxable.
Many directors don't realise that private medical cover is a benefit. It is easily missed, and it is common in P11D enquiries.
The £10,000 limit applies to the total, at any point in the year. A single large withdrawal in March can spoil a year that otherwise looked clean.
The benefit-in-kind charge and the section 455 charge are different. One falls on you and isn't refundable. The other falls on the company and can be reclaimed. A loan can trigger both.
The 6 July and 22 July dates are fixed. Late forms and late payments cost money. Ask us to build them into your calendar.
The emissions band can change the tax by thousands of pounds a year. Check the benefit before you order.
Without a good record of what was provided and what you paid back, the P11D is guesswork. Keep notes throughout the year.
The car percentages rise each year, and rules on benefits are reviewed regularly. The Autumn Budget is due on 28 October 2026. What I have written is correct for October 2026, so check again before acting on a large decision.
If you would like to know the tax cost of the benefits you receive or are considering, we'd be glad to help. At Peter Hodgson & Co, we work with sole traders, contractors and company directors across Tunbridge Wells, Tonbridge, Sevenoaks and the rest of Kent and the South East. We can work out the cost of each benefit, prepare your P11D and P11D(b), advise on cars and loans, and make sure nothing is missed.
To arrange a conversation, you can complete the "Contact Us" form on our website, call us on 01892 515 733, or send us an email at info@peterhodgson.co.uk. We would love to hear from you!
Disclaimer:
The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.
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