How does one benefit from Claiming expenses from his Ltd. Company

[nabeelfarid]

Hi guys,

Hope you all doing well. I am starting to work as a contractor from next month and I have decided to go Ltd after a lot of research.

However I have a simple query regarding claiming expenses. It might sound stupid but thats because i have no knowledge of how accounting and tax works.

My question is, How does one benefit from Claiming expenses from his own with 100% share Ltd. Company?

E.g. My company earns a total of £5000/month. The salary I take out is the minimum salary according to national minimum wage e.g. £1000/month. I pay tax on this e.g. £100. The rest I take out as divident which would be £3900. Now, if I am spending £30/month on travelling and I am claiming £30, how does me or my company benefit from it as compared to not claiming these £30.Because I will get the rest of the amount £3900 as dividend any way.


To Summarise, on monthly basis

Company earns £5000
My Salary (minimum wage) -£1000
All kinds of Tax on my wage -£ 100
I take dividend -£3900

Now if I am paying £30 from my pocket or salary for travelling expenses, why do i need to claim it from my own company when all the money in the company is already mine (I will take them as dividend).

I have heard that claiming expenses will reduce taxes. But how does it work. What is the formula and does it really reduce taxes even if you are taking minimum salary.

Please enlighten me with your knowledge in this regard.

Awaiting,
Nabeel

[VectraMan]

You've forgotten corporation tax, which is 20% (21% soon) of the profit - that's the money after your salary and expenses have been paid.

[ferret]

Thought had better answer before the evil regulars see this post

There is a flaw in your cunning plan:

To Summarise, on monthly basis

Company earns £5000
My Salary (minimum wage) -£1000
All kinds of Tax on my wage -£ 100
I take dividend -£3900

So how will you pay your corporation tax? Corporation tax is a tax on company profits. Dividends are not included in company outgoings so are still part of your profit and will be taxed as such.

This is where expenses come in. Legitimate company expenses (mobile phone line rent and calls, computer equipment, internet connection, books, training courses, plasma tv and ipod if you believe some on here) are all expenses that reduce your profit and therefore reduce the amount of tax you pay

Obviously some of the expenses can be things that you may have bought as an individual out of money you have already been taxed on so it is a saving.

HTH.

[Ardesco]

You should work it out as the following:

Income £5,000/Month

Pay (£5,225/12)=£435.42/Month
Travel £30/Month

Total Profit (£5,000-£435.42-£30)=£4,534.58/Month
Corporation Tax (£4,534.58*0.20)=£906.92
Money Available for Dividends (£4,534.58-£906.92)=£3,627.66/Month

Assuming income of £5,000/month for the whole year and always taking all money out as dividends; Dividend you can take out Tax free £2,339.58.

Dividend that will take you into higher tax band and need to pay 25% tax on £1288.08 which is £322.02 tax and £966.06 take home.

Total take home per month (£435.42+£2,339.58+£966.06)=£3,741.06
Total Tax paid per month (£906.92+£322.02)=£1,228.94

As you can see the greater your expenses the lower your profit hence the lower your corporation tax.

I've probably made a mistake somewhere as well as IANAA

HTH

[nabeelfarid]

Thanks for the response guys. its really helpful...Its all making sense now

[Sockpuppet]

Technically the response is "you don't benefit from expenses" otherwise that would be a BIK expenses must be incurred etc and only pay what you spent out etc.

Ok for allowances (e.g. 40p/mile, home office etc) that is different.

[VectraMan]

Very roughly the rate of tax you pay dictates how much better off you are claiming expenses. If you stay out of the upper rate and pay just the 20% corproration tax, then for £100 expense you're £20 better off claiming than if you didn't bother.

[ASB]

Very roughly the rate of tax you pay dictates how much better off you are claiming expenses. If you stay out of the upper rate and pay just the 20% corproration tax, then for £100 expense you're £20 better off claiming than if you didn't bother.

Or, potentially 40 quid better off as a higher rate taxpayer if you don't claim it from the company but claim it solely from your income under self assessment.

[nabeelfarid]

How do you calculate whether you have to pay 20% or 25% corporate tax ?

[Rangster]

You should work it out as the following:

Income £5,000/Month

Pay (£5,225/12)=£435.42/Month
Travel £30/Month

Total Profit (£5,000-£435.42-£30)=£4,534.58/Month
Corporation Tax (£4,534.58*0.20)=£906.92
Money Available for Dividends (£4,534.58-£906.92)=£3,627.66/Month

Assuming income of £5,000/month for the whole year and always taking all money out as dividends; Dividend you can take out Tax free £2,339.58.

Dividend that will take you into higher tax band and need to pay 25% tax on £1288.08 which is £322.02 tax and £966.06 take home.

Total take home per month (£435.42+£2,339.58+£966.06)=£3,741.06
Total Tax paid per month (£906.92+£322.02)=£1,228.94

As you can see the greater your expenses the lower your profit hence the lower your corporation tax.

I've probably made a mistake somewhere as well as IANAA

HTH

Does any kind person have a spreadsheet that calculates this all for you if you plug in the numbers?

Thanks,
Rang