Can You Pay Personal Tax From Business Account
23rd June, 2023
Personal and business tax deadlines come around fast. It is important for you to get on top of your tax bills with money saved to avoid any stress when coming to payment deadlines. This also avoids unwanted tax deadline penalties and interest charges.
It is a good idea to separate your personal and business finances, but what if you don’t have the funds to pay your personal tax account bill in your personal account? This is what we will be discussing in this article today, so read on if you wish to learn more about paying your personal tax liability from your business account and the possible implications.
Pay Personal Tax From Your Personal Account
The bottom line is that you should intend on paying your personal taxes from your personal account. To make sure you are in a position to do this, you should have the money saved and ready to pay your personal tax bill when it comes around at the end of January and July each year.
In circumstances where you are unable to pay through your personal bank account, you can withdraw the money from your business account and deposit it into your personal account to pay your tax bill to HMRC.
Some may find this process a bit of a hassle or inconvenience; we understand. It is possible, however, to pay your personal tax from your business account, but please note that this can have some implications.
The implications of paying your personal tax from your business account will depend on the structure of your business.
Sole Traders
As a sole trader business, your personal and business taxes are filed and paid at the same time because you as an individual are the trader and you may have your business finances together with your own personal finances. It is not illegal to do this if you are a sole trader, but it can prove to be a costly and time-consuming mistake down the line.
The process of bookkeeping and separating personal expenses from trade expenses is a lot harder for you if you have a joint account for business and personal finances and so we always advise that you have separate accounts for each.
This helps with monthly budgeting as well as allowing you to set aside a portion of the money you make to pay your tax liabilities. It will also save you time and money when submitting your accounts to your adviser to complete your tax return.
Limited Companies
If your business is a limited company, then business taxes are kept separate from your personal taxes. It is a legal requirement that you have a dedicated business bank account for all business transactions.
Any personal tax paid from the company must be recorded as a dividend (assuming you are the 100% owner) or added to your director loan account. Personal tax is due on a dividend and if the payment is added to the director loan account the implications are multiple and are dealt with in our comments below.
Limited Liability Partnerships
With a limited liability partnership, the cash you take from the LLP is drawings against the profit you will be allocated as set out in the partnership agreement. The LLP and you both submit a self-assessment form at the end of the tax year. This is similar to a sole trader business, as you are seen as self-employed but cash withdrawn must be agreed with your other partners.
What Is a Director’s Loan?
A Director’s Loan is money you take from your company’s finances as a loan to yourself. This is money that is not a salary, dividend, or expense repayment; it is a loan from your own company to you.
As the director of a company, you have the benefit of being able to do this and the loan may be interest-free but there are tax implications but it may be a cheap source of funds as opposed to having to source a loan from the bank or elsewhere.
With a limited company, it is important to keep your personal finances separate from your business ones; The company protects you from financial liability and as such is a legal entity in its own right so it is required that you recognise that the money in the company belongs to the company.
A Directors Loan Account will record all of the transactions between you as the director and your company. This includes the money taken out of the company that is not an expense, dividend, or salary, as mentioned above. It also includes money taken out for cash withdrawals, personal expenses, and personal taxes too.
If personal expenses are paid by the company and recorded in the Directors Loan account, the VAT on the invoice cannot be claimed if your company is VAT registered. At the end of the year, the Directors Loan account is usually cleared by declaring dividends from the company profits.
A Directors Loan means you will owe the company that loan at the end of that financial year. If you fail to repay the loan to the company, it can have complex tax implications, including some heavy tax penalties that you definitely will want to avoid, so make sure you pay it back in time. This will be the subject of a separate blog in the near future.
How to Avoid Paying Your Personal Tax From Your Business Account
One way to avoid paying your personal taxes through your business account and taking out a Director’s Loan is to budget your personal finances accordingly throughout the year and save, ready to pay your personal taxes when the time comes.
If you struggle to budget and save effectively, you can receive expert help and support with creating an appropriate budgeting plan. This is something that Haggards Crowther can effectively help you with.
Haggards Crowther Can Help You
At Haggards Crowther, we are Chartered Accountants and Chartered Tax Advisers. We have a broad range of services to suit your business and individual needs.
If you are a sole trader business or need any kind of help navigating your personal tax from your business’ finances, then we assure you that we can help.
Haggards Crowther is made up of a team of dedicated experts and professionals who will be there for you, whatever you need. If you are stuck on knowing whether a Director’s Loan is the best borrowing plan for you, then we can definitely help advise you on the best plan of action to help you pay for your personal taxes.
Overall, if you can file your business and personal taxes separately, then do so. If you are someone who is reading this and is not currently separating your business finances from your personal ones, then now is a good time to start. This will streamline your tax filings and accounts.
You can ask for specific advice from us whenever you need it. Our friendly team is willing to help you with whatever you need from us.
Contact us today for all your business and personal tax support and advice. We also provide services in the areas of crypto accounting, payroll management, tax returns, start-up support, and specialist tax support. This list names just a few of the quality services that we can offer you at Haggards Crowther.
Hamid has a wealth of experience advising owner-managed businesses across a wide range of issues, including the sale of businesses, value generation for shareholders, and formulating and advising on tax-efficient strategies. He’s also a specialist at helping start-up companies reach their full potential through teamwork, strategic thinking, and leadership.
His expertise spans technology, cryptocurrency, property investment, and various service-based industries, offering clients tailored solutions to navigate their unique challenges effectively.
