Keeping business and personal taxes separate
The most important thing you need to do is to keep records of absolutely every single expense. Keep every business expense receipt and make a note of any purchases that involve costs divided between business and personal (for example, fuel for your car). This ensures that when it’s time to do your tax return there are no hidden surprises and everything can be found and tracked easily.
Also, make sure you have separate bank accounts for your business and personal needs. Be diligent and never mix the two. If you’re a sole trader, it’s worth looking into having two bank accounts, each with 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 then you need to 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 apart, so that there’s no confusion or misunderstanding.
When it comes to travel, as a self-employed person you need to monitor your mileage because 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 make a note of your mileage so that your company can calculate what they must pay, based on the value of the car benefit.
It’s very important for you 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.
The amount of money that company directors can take as a salary before being taxed is detailed on the GOV.UK website. 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 to HMRC.
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 the only personal debt you have 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 may you struggle to get funding because the amount of debt will look bad to possible investors and creditors. It’s also extra stress and risk for you.
Your business can’t pay off personal credit cards
You absolutely cannot pay off a personal credit card debt directly from your business account as this is not the debt of the company, 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 a 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 tax and personal tax are two completely separate entities and are treated as such by HMRC, so a corporate tax rebate will be issued to a company, not an individual.