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  • Numpty tax question
  • rickmeister
    Full Member

    Quick point of clarity please as its my first year of self employed tax declaration.

    Sole trader, VAT reg

    I have two accounts for my business, one for paying stuff into, one as a vat stash so I can pay that straight away when I need to.

    If the nominal figures for earnings are 100 units, I carve off 20 units into my vat account leaving me with 80 units in the business account.

    Over the year I have “paid” myself 40 units into a shared account with my partner for day to day, bills etc etc.

    So paid in 100
    Vat 20
    Pay 50 (but a % of this will be the first tax free allowance, I know)
    Left in biz acc 30

    Am I paying tax on 100, 80 or 50 ?

    Or is it not that simple… I am a bit gripped as to how much I may have to pay…. and the 50% of the next year was a bit of a surprise too..

    Thanks

    jockhaggis
    Free Member

    I’m fairly sure as a Sole Trader it all counts as earnings no matter if you leave it in a business account or move it into a personal account. So it will be business income minus outgoings, i.e. any purchases or expenses. So the simple answer is that you will pay tax on roughly the 80%.

    However, it’s not really that simple. 😕

    VAT on income can be cancelled out against business purchases which include VAT. Also you will pay NI which is deductible against the 80% figure above. Also any expenses incurred in the business will be deductible against the 80%, this can be anything used or purchased for the business.

    So the ‘not so simple’ answer is non of your figures above but probably somewhere between 50 and 80.

    Do you have an accountant? I would get one as they can give you advice and do your end of year tax return and they can save you more money than they cost. You don’t want to end up in a pickle with the HMRC. 😀

    stimpy
    Free Member

    I’m no tax accountant but I am a VAT registered sole trader.

    Your maths in your example are wrong.

    If you charge a job at (for example) £100 then the customer actually pays £120 because you add 20% to your job price of £100.

    But your example is £100 – so if you get £100 from the customer you keep £83.33 and £16.66 of the £100 is VAT (at 20%).

    From the £83.33 you then deduct business expenses – rent on business premises, overheads like lighting, electricity etc (for example say £25).

    You also are required by law to pay National Insurance contributions.

    Then as a sole trader you pay income tax on a bit less than £58.33 (which, in your terms is 100 units, less VAT of 16.66, less business overheads (e.g. 25 units) and less whataver NI contributions you have to make).

    As a sole trader you cannot ‘pay yourself’ in the way you describe. Jockhaggis is correct – you pay tax on everything, it all counts whether you have it in a ‘business’ account or a personal account. You cannot ‘pay yourself’ a salary and count that as a business expense. Sorry.

    The reason is that you and the business are the same legal entity (and therefore the same taxable entity). It would be different if you started a limited company – which IS a separate legal entity from you personally.

    And you’re right, you pay your tax in two large lumps (Jan and July – happy new year!) and you pay 50% of your tax ‘on account’ – i.e. before you actually draw up accounts for that tax year. Welcome to self-employment…

    I think you need an accountant. But the good news is that your accountant’s fee is a tax-deductable business expense 😀

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    rickmeister
    Full Member

    Thanks for this… I have an accountant but I am just figuring things out ahead of what may happen…

    mastiles_fanylion
    Free Member

    You pay tax on profits. Vat is not profit. You are taxed on profit whether or not you actually take it from the business or if it is sat in a business account doing nothing. Profit is all the income the business generated less overheads (rent etc). The money you pay yourself is NOT overhead. Money you pay staff/freelancers etc is.

    rickmeister
    Full Member

    Thanks M-F

    Accountant visit tomorrow

    earbyphil
    Free Member

    why not take advantage of the one day courses offered by your local Tax Office. It’s free and it’s sole purpose is to ensure you do not pay too much tax.

    craigxxl
    Free Member

    Stimpy explained it well for you.

    If you’re submitting your 2011/12 return you are aware that you have missed the deadline which had already been extended to 2nd February 2012. You will now incur penalties unless HMRC have given you an extension.

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