Here’s another of our regular insights into how we help our clients to maximise their profits. This time we’ve focused on helping limited company directors to understand what they can and what they can’t claim against tax.
If you have any questions about this, please give us a call today. We’re here to help!
Firstly, what is a limited company?
A limited company has shareholders and directors, the shareholders own the business, and the directors run the business. The shareholder can also be the director. A limited company is legally and financially separate from its directors and shareholders.
Limited companies have to be formed through Companies House and this can be done by either an accountant or a solicitor, or a formation agent. Limited companies have to file accounts with HMRC and Companies House, and have much more stringent reporting rules than sole traders.
Certain legal responsibilities are placed on the directors of limited companies. You can find the legal responsibilities on the government website but in summary, directors must act responsibly, honestly, and in the best interests of their company while keeping proper financial records and meeting all filing and tax obligations.
How is a limited company taxed?
A limited company pays corporation tax on its profits. How much is dependent on how much profit the company makes. Companies that make a profit of £50,000 or less pay tax at 19%, companies that make profit over £250,000 pay tax at 25%. There is a sliding scale on all profits in between.
Instead of paying capital gains tax on asset disposals, companies pay corporation tax on this too. Company directors also pay personal income tax on their earnings, usually as a salary paid through payroll. Shareholders can draw dividends given that there is enough money after tax to cover the dividend.
Dividends have different tax brackets, and there is a yearly tax free allowance of £500 per person. Currently the tax brackets for dividends stand at 8.75% if you are a basic rate taxpayer, 33.75% at a higher rate and 39.35% at the highest rate. Thankfully, no national insurance is payable on dividends.
What expenses can a company claim against tax?
Claiming expenses against tax means claiming expenses before corporation tax is calculated. This means that, hopefully, total corporation tax should be less. Writing off expenses against tax must be done carefully, however, since incorrect classification or calculation can result in legal escalation.
Here is a basic list of expenses that a limited company can claim against tax:
Office or commercial unit rent: covering rent, rates, gas, electricity, insurance, cleaning and security
Business insurance: e.g., employer’s liability/indemnity insurance
Printing, postage and stationery
Goods for resale (cost of sales)
Staff costs, including pensions
Telephone and internet
Computers and software
Travelling and subsistence costs
Staff training related to the business
Protective clothing and uniforms
Marketing, advertising, website and publicity costs
Legal and accountancy fees
Bank charges and interest
Equipment purchased for the business
Entertainment is not an allowable expense, except in the following circumstances:
The company can claim up to £150 per staff member for staff entertainment, including the staff member’s spouse.
The company can claim the expense when entertainment is provided as part of a contractual agreement.
The company can claim for gifts less than £50 per year given to clients or suppliers with the company name displayed on the gift.
Note: when it comes to pensions, a limited company director can also choose to have a pension contribution paid by the company and this is tax deductible on the company.
There is an A-Z of business expenses and benefits, including whether you have to pay tax or National Insurance on them, on the UK government website.
Conclusion
In summary, it is always advisable to consult with a professional accountant when deciding which expenses you can claim before tax.
Here at PBT Accountancy, we help with all things expenses and tax related. Even better, we take a ‘Profit First’ approach, so we calculate how much you want to pay yourself as the business owner by deducting your target profit from total sales, putting aside your profit first before you pay your expenses! Want to know more about Profit First? Check out another of our blogs on 'How a Profit First Accountant Can Help You Scale Up Your Business'.
If this sounds like it could work for you, contact us today on 📱 01242 357 766 or 📨 info@pbtaccountancy.co.uk.
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