Out of pocket business expenses and tax

July 6th 2021

Susan has been meeting some business expenses out of her own pocket. But can your company pay you interest for using your own money and is there any tax advantage to doing so? Naomi Swan takes a look.

Susan is the sole director and shareholder of a small company. She frequently travels for work and pays the costs using her personal debit or credit card. Every so often she totals the business expenses and draws a company cheque to cover it. But is she missing out on tax free money?

Overlooked expenses
The first point we would make is that Susan only ever claimed for the expenses she could identify from her bank and credit card details, e.g., hotels and travel fares and so on. There was nothing for meals apart from those included on the hotel bills paid by card. Even though Susan would find it difficult to identify out-of-pocket expenses from bank or credit card records, and impossible where she had paid cash, this does not prevent her from claiming reimbursement now for retrospective costs.

If Susan identifies the days when she travelled for work where she would have been away from the office for at least five hours, or she started her journey early or finished late, she can claim an HMRC-approved tax and NI-free allowance from her company for subsistence. She can claim it for the current tax year and the previous four. For example, if she makes an average of, say, 50 journeys a year it could add up to £1,250 or £6,250 tax free over five years.

Keep a note on your mobile phone of business expenses.

Where is the advantage?
Even where you own 100% of your company it is worthwhile claiming all the tax and NI-free amounts you are entitled to. It reduces the corporation tax bill for your company without costing you.

If you do not need the money, you can claim the expense but instead of taking the cash, you can get your accountant to credit it to your director’s loan account so you can take it at a later date. This also creates another tax and NI-saving opportunity.

Interest on director’s loan account
Where your company owes you money, for example when your director’s loan account is in credit, you can charge interest. The rate should be reasonable and closely comparable with the rate a bank would charge your company for an overdraft. The interest it pays is a tax-deductible expense for your company and potentially tax and NI free for you.

Where your company pays interest to an individual, including its directors and shareholders, it must deduct basic rate tax (20% for 2020/21 and 2021/22) from the payment. As the recipient you can reclaim it if you pay tax at a rate lower than the basic rate. But if you are a higher rate taxpayer, you will have to pay extra tax.

It is tax efficient to claim reimbursement for out-of-pocket business expenses that you personally incur. It reduces your company’s tax bill but does not cost you any tax or NI. You can leave the money in the company rather than draw it and it can pay you interest on what it owes. This too is tax deductible.