I have a client who has a bought a car for business use although he does use it for personal use too.
He has asked me whether he can pay himself an allowance, how would I go about this?
Also, he doesn't pay himself a salary which I'm sure that he should really do, or maybe a dividend?
Which way would be more tax efficient? If he pays himself I dividend, am I right in thinking that if he is paid below the threshold he doesn't pay any tax on that or will he still pay 10%? If he runs it through PAYE he'll be liable for tax and NI, I'm trying to get him the best deal.
Yes he can have a car allowance but this would be paid via PAYE, so he could have up £833 in salary/car allowance without any tax deducted assuming he is on 1000l code. There would be some NI payable but if you are able to claim employers allowance then there would be no ers ni. Otherwise £663 could be paid monthly without any NI if for some reason you cannot claim the allowance. If he went this way he could still claim business mileage if appropriate as he is effectively using his own car, however he cannot put any other expenses relating to the car through the business without it incurring a P11D benefit in kind charge and NI class 1A.
Dividends can be distributed from taxed profits/reserves. They come with a notional 10% tax credit so he does not have to pay a further 10% tax on those. If his total taxable income from all sources including the grossed up dividends is below the higher rate threshold then he will have no additional personal tax to pay on those dividends.
Thank you very much for your reply, that has helped me a lot. I will run this past him to see how he would like to work it, I think that paying him £833 per month would cover the finance costs on the vehicle and the petrol cost he's incurred for this year. Next year, I will try and persuade him to keep a record of his mileage so that he can claim the 45p per mile, that in my eyes would work out marvellously for him but his record keeping isn't that great, so we shall see!
Sorry Rob - Just another quick question. I'm working in the 2013/14 tax year, it's going to be hard to work back with RTI, can you think of a way around it or will he just have to bare the expense for the 2013/14 tax year and start a fresh for 2014/15?
If I file a late return for last year he will then incurr the penalties for filing late, I suppose the figure for that will only be a smidgen in comparison to the amount he'll lose in vehicle finance costs.
