18th May 2020
At MyAccountant, we are not just about pushing numbers around; we believe in educating our clients so they can make the most of operating a limited company.
We assign a dedicated accounts manager to each client, but even then and despite our best efforts, some mistakes keep cropping up. Let’s talk about these in detail; see how to avoid them, and why it is so important that you do.
1. Drawing a high salary
If you are coming from a permanent job, you might instinctively want to set yourself a high salary because you are used to it hitting your bank account at the end of each month.
When you operate through a limited company; however, you are best drawing a smaller amount that you top op with dividends each quarter. As salary is taxed at a higher rate, this will leave you more tax-efficient as explained in our guide here. Your accounts manager is happy to help if you are unsure what level you set your salary to.
The key is to draw a quarterly dividend amount that you can use until your next withdrawal in three months or so.
2. Taking too much money out of the company
Not all of the amount you see in the business account is available to spend. Remember that your company has to pay taxes, national insurance and expenses, and there has to be enough in the bank account to cover these outgoings.
You, as the director, have two methods of drawing money from the company: salaries and dividends. Dividends are a distribution of profits after tax, so before drawing them, it is best to get some management accounts done (ideally quarterly) to see how much is available. Should you need funds urgently, your accounts manager can still look at your books and give you a ballpark figure to ensure that you are not taking too much.
If you do take more than what’s available, the excess will be deemed as a loan from your company which will need to be repaid. If the company runs out of money, it could fail to pay taxes and incur penalties or worst-case scenario; it could end up facing bankruptcy.
3. Using the company bank account as your own
It’s worth remembering that the company’s bank account is the company’s and not the director’s. Only transactions in relation to the business should go through it, such as payments for business expenses and invoice receipts.
Using the company card for personal purchases has no advantages and can make your life more difficult as it will have to be tracked and repaid back into the business account. If it’s not paid back in time, the company could easily be out of pocket and miss a tax or bill payment resulting in penalties and additional interest.
4. Not talking to your accounts manager first
Certain decisions will have implications that can affect your business, and therefore it’s advisable to run it by your accountant. Makes sense, since you already pay for their services, might as well make the most of the advice, right?
So next time you decide to invest the company’s money, purchase a company car or pay for that master’s degree course, please talk to your accountant. You could save yourself from paying penalties or more tax than you need.
5. Leaving your tax return too late
We’ve recently written an article about the benefits of having your personal tax return done early. There is no reason why you should leave this to December and let it ruin the festive season, or to January and start the year stressed.
Having it done early will give you enough time to get your records together comfortably and budget for the payment; or get your repayment early if you are due one. With MyAccountant’s tiered fee structure, it will be cheaper too.
6. Not keeping your records up to date
Being organised and entering your expense can be beneficial when it’s time for your accountant to prepare your accounts. Be it quarterly or yearly accounts you can save yourself hours or even days of data entry, plus you are less likely to miss any of the tax-reducing entries.
As an additional benefit, your accountant will not have to bother you to submit the missing information. To see other reasons why your accountant might be sending you lots of emails, visit our blog post on the subject here.
If you are a MyAccountant client, you’ll have access to FreeAgent, an award-winning cloud software to use to manage your daily admin. We are so far from the old days of filling in spreadsheets now that there is really no excuse for not keeping your records up to date.
We hope you’ll find these tips to make your life as a contractor just that little bit easier. Remember, we are here to help, so if you have any questions, please do not hesitate to contact your accounts manager.
If you are not yet a MyAccountant client, please call 0800 917 9100 or request a call back by emailing firstname.lastname@example.org, we would love to hear from you.