Category: Tax Tip

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Tax Tip – Directors responsibilities 

It seems really simple, you pay a very small fee and set up your own company on Companies House but did you know that you have many legal responsibilities as a director? The sort that mean you might personally be fined or go to jail? Here are some of them. 

Whilst it might feel good to be the director of your own company you have several responsibilities as directors under the Companies Act 2006: 

  • To act within their powers (in the articles of association etc) 
  • To promote the success of the company for the benefit of its members as a whole i.e. not benefitting one member above the company e.g. by allowing one director/shareholder to take out more dividends/loans that the company can afford 
  • To exercise independent judgement – you can take advice but must decide for yourself 
  • To exercise reasonable care, skill and diligence eg using a chartered accountant or professional bookkeeper if you don’t have those skills in house 
  • To avoid conflict of interest  
  • Not to accept benefits from third parties 
  • To declare interests in transactions 

Being a director doesn’t come with a compulsory training (although I do offer a course) so please make sure that you don’t fall foul of the law. 

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Tax Tip – Using your home for business 

If you work from home because you have no other premises, then you can claim £6pw tax free use of home allowance as a contribution to your bills.  

If you use a substantial part of your home for business, then it may be beneficial for the director to rent part of their home to the business. (As this is a commercial letting it is not applicable for the rent a room allowance) 

You should have a rental licence between the director and the company showing the agreed rent and the hours available. The rent may be set at the level of the costs. This rent will reduce corporation tax for the business. The director will then show the rental income and costs on their income tax return. If the rent = costs, there will be no tax to pay. If income exceeds costs, then the director will pay income tax on the profit but there is no national insurance. 

Costs that can be included are: 

  • Rent 
  • Ground rent 
  • Council tax 
  • Service charges 
  • Maintenance 
  • Utilities 
  • Security 
  • Cleaning 

There may also be some relief for mortgage interest (but not repayments so do ensure that you split the monthly charge) 

The costs should be apportioned across the available space by floor area or number of rooms (excluding kitchens and bathrooms). You can choose the most beneficial method, but you cannot keep changing it. In practice it is often simplest to allocate the household costs by the number of rooms. 

If the room is used full time for business, then when you come to sell your home, you may have to pay capital gains tax on this portion of the property. In practice you will probably only use the room part time. If your spare room doubles as your office 5 days per week then 5/7 of the costs can be claimed to offset the rent from the business. 

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Tax Tip – Thinking of a new car? 

Companies can claim 100% First Year Allowances on brand new electric cars with zero CO2 emissions purchased before 31 March 2026. Unincorporated businesses can claim until 5 April 2026. For second hand electric cars or hybrid vehicles with <50g/km emissions you can claim 18% written down allowance per year. 

Benefit in kind for directors/employees of limited companies is based on a percentage of the list price which is increasing each year, 

  • 2% of the list price for 2024-25. 
  • 3% of the list price for 2025-26. 
  • 4% of the list price for 2026-27. 
  • 5% of the list price for 2027-28. 

For unincorporated businesses all costs and capital allowances must be apportioned between business and personal use. This means that you must keep mileage records to support the split.  

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Tax Tip – Should sole traders take advantage of the £1k trading allowance or utilise losses instead? 

Should sole traders take advantage of the £1k trading allowance or utilise losses instead?

£1,000 trading allowance is available for use across your sole trader businesses (one allowance per person, not per business!)

If you have a small side hustle or startup with income (not profit) of less than £1,000pa then you don’t need to report this to HMRC

BUT

you might choose to do so.

If the business is making a loss then you can either offset this ‘sideways’ against your other personal income in the same year to reduce the overall tax paid OR carry it forward to set against future profits from the same business and therefore minimise future tax.

This sideways loss relief is particularly useful if you are starting your business as a side hustle to your main employment.

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Tax Tip – MTD

MTD (Making Tax Digital) for corporation tax has now been shelved as HMRC are turning their attention to e-invoicing which will have the same effect.

In the meantime MTD for sole traders and landlords is still going ahead

April 2026 for those with income (ie turnover, not profit) >£50kpa

April 2027 for those with income >£30kpa

April 2028 for those with income >£20kpa

In order to be compliant we recommend that you

  1. Sign up to Xero (they have a new Simple version starting at £7pm)

2. Connect you bank account

3. Keep your bookkeeping up to date each month

4. Consider joining our monthly bookkeeping sessions which provide both accountability and advice on how to do your bookkeeping (on any system) and some Xero tips.

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Tax Tip

When we complete a corporation tax return we always suggest that our clients pay their tax bill sooner rather than later as HMRC will pay them a small amount of interest AND it means that they won’t forget to pay. Especially now that HMRC have stopped sending reminders. 

HMRC interest rates vary as they are linked to the Bank of England base rate.  

If you pay early you will receive interest at base rate minus 1%, so currently 3.25%. (There is a minimum floor of 0.5% if the base rate goes very low). The interest is calculated from the date that you pay until the date you are due to pay. 

Yes, you can get better returns on your savings elsewhere, especially as you know when you will need to withdraw it to settle your tax bill. 

But, if you forget and pay late, you will pay interest at base rate plus 4%, so currently 8.25%. The interest is calculated from the due date until the date that you actually pay. 

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Tax Tip – 10 point tax review with year end 

When we complete year end accounts for our clients we complete a 10 point tax review for each business as standard to ensure that they are making the most of their various allowances.  

1. Are the using the most appropriate trading vehicle eg sole trader or partnership vs limited company 

2. Should they register for VAT voluntarily or if they have exceeded the rolling 12 month limit (currently £90k including reverse charge income)? If already VAT registered are they on the most suitable scheme? 

3. Should their spouse be a partner, shareholder, or employee? 

4. Are they taking the most appropriate salary vs dividends? 

5. Are they approaching certain cliff edges such as 25% corporation tax, higher income child benefit charge, etc and are there legitimate ways to keep their income below these limits? 

6. Are they investing in pensions? 

7. Should they be paying/receiving interest on their DLA? 

8. Are they using part of their home for business and should they claim these costs? 

9. Are they eligible for Research and Development tax credits and is it worth claiming (as the fees can be quite high for legitimate experts)? 

10.Would they benefit from an EIS/SEIS scheme? 

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Tax Tip – Dividends

If you take dividends out of your business without sufficient profits after tax to cover this they can be classed as ILLEGAL dividends. To avoid this we often end up reclassifying payments as director’s loan account (DLA) but this can lead to additional taxes in the form of Section 455 penalty tax on an overdrawn DLA, class 1A employers national insurance on beneficial loans, and personal tax on beneficial loans. 

To avoid this please stop taking money out of the company and instead check:

  • Will there be sufficient profits left in the business to cover corporation tax? This will require you to have up to date bookkeeping or even management accounts.
  • Will there be sufficient cash left in the business to pay all bills as they fall due? This will require a cashflow forecast. It is particularly important to ensure that you have funds to settle all tax bills when they are due as HMRC take a particularly dim view of business owners helping themselves to cash that should have been used to pay taxes. 
  • Have I completed the correct paperwork? You will need a minute of the board meeting declaring the dividend and a tax voucher when it is paid out or transferred to your DLA?

If you do not have enough money in your business then you will have to find the cash for your personal expenses elsewhere or to alter your lifestyle to live within your means.

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Interest on directors’ loan account (DLA) 

If you have put money into your limited company that has not yet been repaid then you can pay yourself interest on this loan. This can be a tax efficient way to take money out of the company BUT you would need a CT61 form completed for HMRC each quarter. 

If, on the other hand, you have borrowed money from your company then you may face a higher tax charge and even a personal tax charge.  

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Tax Tip – Changes to Companies House reporting 

From 1 April 2027 all small and micro businesses will need to file a profit and loss accounts at Companies House. This makes sense as an anti-money laundering measure but it can mean sharing confidential information such as turnover and margins with competitors. 

As the tax benefits of trading through a limited company are now minimal you may prefer to become a sole trader or partnership BUT remember that MTD (Making Tax Digital) will mean quarterly tax filings from April 2026. 

Talk to us if you want to learn more.

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