Tax-Free Profit Extraction from a Limited Company- Mileage Claims, they add up!
Updated: Oct 21, 2020
Tax-free profit extraction is the holy grail of Business, and there are very few opportunities to do so. Mileage claims are allowable if you use your private car for your business. If you choose this route instead of a company car, you can extract 45p for the first 10,000 miles and 25p thereafter. Travel to and from a normal place of work is not allowable but to customer sites and other business-related journeys are, as are work-related parking costs. These costs are allowable as expenses for the company, saving the company corporation tax when it completes its year-end tax return.
The 45p rate may seem low, however, if you only travel 50 miles a week, this can add up to £1,080 per year, and this is both Tax and National Insurance Free! A higher rate taxpayer would need to earn an extra £ 1,862 per year (£155 per month) to retain £1,080 take-home pay. The 45p and 25p rates are paid for every type of car, so it also allows much more flexibility when choosing which type of car you wish to drive. Another plus is that there is no need to keep receipts for fuel, servicing and other running costs.
It is important to note that if the company pays over the 45p rate, it is taxed as a bonus in your PAYE at the same tax rate as your regular pay. Also if you do complete over 10,000 miles per year, and your company agrees that you should receive 45p consistently, the extra 20p you receive is taxable but is exempt from NI. If payments are at or below the 45p allowance, no reporting on your personal tax return is necessary, and you can claim for under the 45p rate as a reduction in earnings on a self-assessment tax return.
Payments of mileage claims can be made in cash, cheque or by transfer to your private bank account, but only after the necessary Expense Claim has been made.
If you use a Motorbike, you are allowed to claim 24p per mile, and if you are a cyclist, you can claim 20p per mile.
Many office workers bring others to meetings and seminars if you do carry colleagues to and from meetings in your private car you can also claim an additional 5p per mile per passenger - that's up to 65p per mile for you and 4 other people!
Clearly, the mileage claim system is open to abuse, so it is important to keep accurate records for HMRC inspection. Keep notes of the date, the address, the mileage, the meeting reason, and if you did carry any colleagues, who they were. Some apps can record this for you, like MileIQ.
If you have any further questions on any of the above, please get in touch!