Running a business can be an exciting adventure, but along the way, you are likely to face challenges that may leave you wondering where to turn next.
Many business owners deal with common issues during the establishment and growth of their company and need quick, easy to understand answers to their queries.
That’s why we have put together some of the most frequently asked questions that we receive from business owners to offer a little guidance.
If you travel for business purposes, you may be able to claim for any miles you travel in a private vehicle, by claiming business mileage. This is intended to cover the cost of fuel, wear and tear, insurance etc for these business journeys.
Business mileage can be claimed for journeys which are “wholly & exclusively” for business purposes, for example travelling to a client, supplier or temporary workplace, but specifically exclude commuting (i.e. to your normal place of work), and any private journeys.
HMRC sets approved mileage rates, which can be paid tax free to the employer, and are tax deductible in the company. They are currently:
| First 10,000 miles | Over 10,000 miles | |
| Car / van | 45p per mile | 25p per mile |
| Motorcycle | 24p per mile | 24p per mile |
| Bike | 20p per mile | 20p per mile |
If you carry a passenger for business purposes in a car/van (e.g. a fellow employee), an additional claim of 5p per mile can be made.
If a payment above the approved amount is paid, this additional amount will be taxable, and similarly, if a payment below the approved amount is paid, tax relief maybe available to the employer on the difference.
It is important to keep a record of any business journeys made, to substantiate the claim, and these should include the date, locations and number of miles travelled. This can be a diary, spreadsheet or on an App.
Paying business mileage is often used by business owners as an alternative to a company car, but which method is more tax efficient very much depends on the vehicle in question.
A Director’s Loan Account (DLA) is effectively the balance of monies either due to the directors of a company, or that the directors owe back to the company (known as an overdrawn DLA).
The most common reasons for a DLA are when a director lends their company money (e.g. on start-up or for working capital purposes), personal assets are transferred into the company name, and when legitimate business expenses are paid for out of their own pocket, so this money is due back to them.
Withdrawals from a DLA are usually amounts taken out of the company which aren’t classed as salary, dividend or expenses, or repayment of amounts previously lent to the company.
Where a DLA is in credit (i.e. not overdrawn), there are generally no tax consequences, unless interest is charged, which would be taxable income in the directors hands, and must be declared through Self-Assessment.
Where a DLA becomes overdrawn, there can however be various tax implications.
If a DLA remains overdrawn nine months and one day after the year end, an additional temporary corporation tax charge will be payable by the company of 33.75 per cent of the balance outstanding. This is temporary in that it is repayable by HMRC when the loan is cleared in full.
If a DLA is overdrawn by more than £10,000 during a year, and no interest is charged, or is charged at below the official rates, a taxable Benefit in Kind (BiK) charge can arise on the director. This is based on the cash equivalent of the amount of interest that would be payable on the overdrawn DLA at the official rates.
The company is also liable to Employer’s National Insurance at 15.05 per cent on the value of the BiK.
If a DLA is written off, or waived, the amount written off is treated as either dividend income (if the directors is a shareholder), or employment income (if the directors is not a shareholder). In addition, National Insurance will be payable either way.
An overdrawn DLA can be costly, so its vital to keep accurate and up to date records of any transactions entered into with your company, and any balances due.
As a general rule, company cars have become less tax efficient as time has gone by, as the government continuality fight climate change and reduce CO2 emissions. However, the tax implications depend on numerous factors, including the specific model of car, CO2 emissions, type of fuel, how its paid for and the value.
For the employee, private use of a company car results in a taxable “Benefit in Kind” (BiK), which is the amount on which income tax is payable, and National Insurance by the employer.
The BiK is calculated by taking the manufactures list price for the vehicle (irrespective of whether you buy it new or second hand), multiplied by a percentage which is determined by the fuel, age, CO2 emissions and range (if electric/hybrid) of the car.
As the government continues to encourage electric and ultra-low emission vehicles, the BiK percentage for these vehicles is reduced. The BiK percentage for a pure electric car is currently just one per cent of the list price.
For the company, the cost of providing a company vehicle can produce tax savings, but this again depends on the particular car. There are also different rules for new vs used cars – for example, a new and unused electric car attracts a 100 per cent tax deduction in year one, whereas with a used electric car, you can only claim 18 per cent of the cost in year one.
The level of tax relief available also depends on how the car is financed, whether it be an outright purchase, on finance, or a lease.
Deciding on whether to purchase a car through a company is a complex decision, and advice should be taken.
An alternative to a company car is to fund a car personally, and claim business mileage.
It very much depends – and often the most tax efficient way of paying yourself is a combination of salary, dividends and perhaps even pension contributions, in order to maximise any allowances available.
A salary is a payment made to someone as an employee, through the PAYE system. It is a tax-deductible expense of the company and can, therefore, help reduce the amount of corporation tax payable, and can also be paid out irrespective of profit levels.
For the employee, amounts not covered by personal tax-free allowances, attract income tax at a rate of between 20 per cent and 45 per cent. National Insurance is also payable by both the employer and employee. However, if paid at the right level, a salary can help gain qualifying years for state pension purposes.
Dividends are a share of a company’s profits and are paid to the shareholders in proportion to the shares that they hold. Unlike a salary, dividends are paid after corporation tax is deducted, and are therefore not a tax-deductible expense.
Dividends do attract a lower rate of income tax (8.75 per cent to 39.35 per cent) compared to a salary, and neither the employee nor employer pays National Insurance on dividend payments. There is also a personal tax-free allowance, meaning the first £2,000 of dividend income is tax free.
However, dividend payments can only be paid out if profits have actually been generated, so if there is no retained, or accumulated profits, then no dividend payment can be made.
Although not a substitute for salary and dividends, the third way of extracting funds is by means of a pension contribution paid directly from the company, as an employer’s contribution.
Employers pension contributions do not form part of your income, and therefore don’t incur an income tax liability, but are tax deductible by the company, meaning a saving on Corporation Tax.
There are however annual limits to what can be paid into your pension by an employer (currently a maximum of £40,000 depending on income), and also you wouldn’t be able to access the fund until at least the age of 55.
There is no one size fits all answer, and very much depends on the profitability of the company and personal circumstances.
We’re always here to support you, whatever your query may be, so make sure you seek our advice, as and when you need it.
