Separating Personal and Business Finances

Keeping business and personal finance separate

The most important thing you need to do is to keep records of absolutely every single expense:

• Keep every business expense receipt
• Make a note of any purchases that involve costs divided between business and personal (for example, fuel for your car).

This means that when it’s time to file your tax return, there are no surprises, and everything can be found and tracked easily.

Also, ensure you have separate bank accounts for your business and personal needs. Be diligent and never mix the two.

If you’re a sole trader, having separate personal and business bank accounts is worth looking into. Each one should have a separate debit card and online banking login. This will help you when you come to do your books. If you run a limited company, you must have a dedicated business bank account.

If you have a family or partner, talk to them about the need to keep business and home expenses separate. This will help ensure there is no confusion or misunderstanding.

When it comes to travel, as a self-employed person, you need to monitor your mileage. You’re allowed to claim allowable business expenses. However, you’re not allowed to claim for non-business-related travel. This means that you should keep a close eye on your mileage for both business and personal travel and write it down.

If you’re employed and your boss pays for all your fuel (both for business and personal travel), you need to note your mileage so that your company can calculate what it must pay based on the value of the car benefit.

You need to understand what constitutes a business expense. So do your research and learn what exactly you can and can’t include in your tax returns.

Dividing income, your own salary and business dividends

Limited company directors in the UK can take an income in the form of a salary and business dividends. For tax efficiency reasons, most company directors who have a hands-on role in the daily operation of the business will take a nominal wage (minimum wage) and dividends based on business performance.

GOV.UK details the amount of money that company directors can take as a salary before being taxed. You can also find out the amount directors can take as dividends on the HMRC website.

Both of these amounts (salary and dividends) along with other expenses, must be declared in your annual tax return.

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Should you clear personal debt before beginning a business venture?

This decision depends on your own, unique situation. Before deciding, you need to look at both the type and amount of debt you have.

Type of debt

If your only personal debt is a manageable mortgage, you’re probably fine starting your business venture. After all, that mortgage will probably be there for decades to come. However, if you have several credit cards you’re paying off that have high interest rates, it’d probably be better to focus on paying them back as quickly as possible before starting your venture.

Amount of debt

With a small amount of personal debt that can be paid off easily or in small monthly sums there should be no problem beginning a business venture. However, if you have a significant amount of debt, you’re probably unwise to start your business venture just yet. Not only could it make it harder to secure business funding, but heavy debt may also be a red flag to potential investors and creditors. Being debt-free can also guide you in making smart credit decisions for your business, like deciding which customers to offer credit terms to and setting appropriate credit limits to help prevent bad debts. It’s also extra stress and risk for you.

Your business can’t pay off personal credit cards

You should not be paying off a personal credit card with a business account. This is not the debt of the companyas it’s your personal debt. This applies even if you’re a sole trader, freelancer or contractor.

It’s important to keep your company and personal finances completely separate. Failure to do so could land you in hot water with HMRC.

Any earnings from your business can be used to pay off credit card debt, provided you have first taken this money as either salary or dividends. It should be declared and accounted for in the usual manner, even though you may specifically need it to pay off a credit card.

Corporate tax rebates don't show up on personal rebates

If your company is obligated to pay corporation tax, and you make a loss on trading or dispose of property or an asset, you might be able to claim a corporate tax rebate. This rebate is calculated by offsetting the loss against the profits made in the same accounting period.

If a loss is made on a corporate tax rebate, it won’t show up on a personal rebate. This is because corporate and personal tax are two completely separate entities and are treated as such by HMRC. Therefore, a corporate tax rebate will be issued to a company, not an individual.