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 😀
