As a limited company owner, you probably know you can claim the business miles you do in your own personal vehicle.
What you may not understand is how to physically ‘claim’ the money from your company.
So, in this blog we cover a few ways you can do this. As usual, we are presuming you are a director of your own UK limited company, as the rules and process would vary in other situations.
A quick reminder on business travel
Business travel may seem simple, but what journeys are actually claimable can be a complex topic. So before following some of the steps below, remember to work out if the journey is claimable in the first place!
For example:
· You cannot claim for regular commuting to your office every day
BUT
· You can usually claim for travel to a ‘temporary workplace’
·
Business travel – the basics
We covered some of the basics in our previous blogs on the subject:
Claiming limited company fuel expenses
Travel costs for the self-employed (Technically it’s slightly different for limited companies, but the broad concepts are similar.)
Steps to claiming your mileage
There are a few crucial steps to making a mileage claim from your limited company.
1. Log your miles
This may sound completely obvious, but you will need to record the qualifying business miles. Various apps can do this for you (including Xero and QuickBooks). Otherwise, a simple spreadsheet, or even a pad and pen will do!
Record as much detail on the reason for the trip as you can, along with the mileage.
2. Calculate your claim
Be careful on tracking your mileage amounts as they are per tax year (6th April – 5th of the following April), not per company year.
The mileage rates used to be pretty nice as they were intended to cover some wear and tear, running costs of the vehicle etc. However, with current fuel prices as they are and the fact the values haven’t moved for some years, the current rates do not feel that generous!
At the time of writing, you can claim 45p per mile for the first 10,000 miles in a tax year, and 25p thereafter.
3. Enter into your records
You now need to enter your claim into your accounting system. This will either be:
o An auto entry created by a mileage accounting app
o A tab on your spreadsheet
o An entry on your accounting records book
o An ‘expense claim’ or ‘bill’ in your accounting software
o Entering a ‘journal’ with the claim into your accounting software (see below)
Many accounting apps now include a mileage tracking feature using GPS and other technology. Some will charge for the feature, some don’t, but you don’t have to use that feature.
You could just enter the claim directly into your software another way. Even with some of the automatic calculations in the software apps, you still have a manual process later to approve and/or categorise the claim.
If you’d like to enter a single entry either annually or whenever you remember throughout the year, one option is to create a ‘journal’.
You can usually find a button somewhere to ‘add a journal’. You then need to enter details into the journal, which may look something like this:
4. Decide if (or how!) you will repay yourself
In the journal entry example above, we categorised it as ‘Directors Loan Account’. This means that the company owes you the money at a later date, or will offset some of any money that you’ve potentially already drawn.
If the company has funds and you’d like to repay yourself the exact amount, you can simply do so on your online banking app straight to your personal account.
5. A key point to remember about repaying yourself
Unless you are getting physically paid mileage by your client / customer, there is no ‘extra’ free money to pay yourself this mileage amount.
So, you are paying yourself out of the available company money.
Many business owners struggle with this concept. It is not an extra invisible pot of cash. You are ‘creating’ some money by reducing the tax you might have to pay over, but it’s not 100% of the claim.
A few words on VAT
If you are VAT registered, it’s likely you could claim some VAT back on that mileage figure. We’ve not covered that here as its detailed and somewhat complex, but you we’d like you to know it’s a possibility.
Muddled about mileage?
First ask your accountant about any mileage allowances that might apply to you, and where to enter them in your software. If you don’t have an accountant, or feel you aren’t making the most of your mileage allowances with your current accountant, we’d love a chat about how we can help.
How to plan for your ‘dividend tax’ bill
Are you paying yourself from your limited company with dividends? It’s often a tax-efficient method, but it’s not generally tax-free. So, make sure you plan ahead and budget for the ‘tax bill’. Here’s how.
Dividends and personal tax
As a small business owner running a ltd company, you can often take some funds from the business as dividend. Many owners do this because it is usually efficient, and the paperwork is often easier actual ‘salary’.
When you do this, it’s very likely that you will have some personal tax to pay on those dividends. This is the #1 area we see limited company business owners trip up on – failing to plan and manage this tax bill.
If you get this wrong, it can seem like you are going round in circles. You could be constantly playing catch up and paying tax out, and feel like you are in a hole that you can’t get out of.
So, here are some thoughts on how you could plan for paying this tax and avoid that hole!
A quick reminder on how dividends work
Dividends are paid out of ‘retained profit’. So, what is ‘retained profit’?
This is the profit remaining after you’ve paid all of your expenses, accounted for the depreciation on any equipment, vehicles etc. the company may own. More importantly, you must have taken into account any tax the company owes now and in the future.
Keeping this super high level, what is then left is in theory a pot of money that is available for dividends to be paid from. This may include past profits not yet paid out.
The most important point of all
Needless to say, technically there is more to it than this, but it does show the key point about what profits are usually available. This is the crucial issue of the tax point. Many owners come unstuck because they fail to realise that the ‘pot’ of retained profit that is available needs to take into consideration CURRENT company tax bills.
Personal tax and payment via dividends
When you are paid using dividends, you are taxed personally on these.
So how can you plan for your personal ‘dividend’ tax bill? There are 3 common strategies here.
1) Additional dividend
When the bill arrives, draw the money as an additional dividend to pay your personal tax from your company, when the time comes. BUT (and it’s a big but), this is by far the most dangerous option, as you could be in a situation where there are not enough profits to pay out a dividend to you to allow this.
You could be in a situation where you have the cash to do this, but technically on paper there are not the profits to do so. This can cause further tax issues. For example, you may currently have the cash because the company has a future tax bill due at a later date. So, whilst the cash is there, it’s not technically available to be a dividend.
This is the option where you find you can get into that loop of, draw money > get tax bill > draw extra money (that creates another tax bill) to pay tax > next year get larger tax bill > draw extra money (that creates another tax bill) to pay tax > etc.…
2a) Set aside some money
Set some of the money you draw aside for your personal tax bill. Some owners will do a ‘provision’ to give them some funds that should roughly cover the bill.
At the time of writing, a solid rough provision would be:
o 10% of the money you draw, up to the first £50,000,
then
o 30% on the next £50,000
If you are drawing more than £100,000, you would need to carry out more accurate planning.
The keen eyed will realise that 10% is more than the actual tax rate on those dividends, and 30% is slightly less than the tax on the higher rate dividends. Our experience is that if you put aside these percentages, you generally will have the funds to pay the bill. It’s never an exact science when using a provision approach.
2b) Work out what you will owe
This involves setting some of the money you draw aside for your personal tax bill, but working out in advance what that bill will be. You then have a goal to work towards. This will make it easier if your personal cashflow needs fluctuate month to month. It would give the ability to save more some months, and less on others!
I’m still confused about paying myself with dividend/s
Ask your accountant about payment by dividends, or book a consultation with us. We offer a paid 1 hour, 1-2-1 consultation so you can ask simple questions of an accountant. You don’t have to become a client, so it’s a great way for you to get the help, when you need it.
If you don’t have an accountant, we’d love a chat about how we can help.
