Newbie sole trader Tax worries!

[The Cube]

I have been a sole trader since March 2008 and was wondering how much to pay oneself. As my house bills are being covered it leaves me with almost nothing. Since March I have collected in excess of £8500 (and another £4500 pending) through invoicing my clients but 90% - 95% has been used to pay a backlog of bills. Is this going to pose a problem later and on the basis of £8500, how much will I have had to put aside for Mr Tax Man?

I know living in the 'now' is not a good thing to do, but I need to keep the roof over mine, my fiancé and my business' head!

[CassioAcc]

Difficult to say from the limited details above - is this your only income ?

Generally for 08-09, you will have a tax free allowance of £5,435 and will pay 20% on anything up to £36,000. You will also have to pay Class 4 NI on any profits ( 4% on profit between your tax free sum and £40,040)

You can however offset business expenses

Have you registered with HMRC ( and also for Class 2 NI)

[The Cube]

Yes I have reg. with HMRC as a sole trader and it is my only income. But I have recently purchased a kangoo van with company money for deliveries and client meetings.

[dp0848]

I think Cassio has made a typo in his answer. Class 4 NIC is levied at 8% not 4% on profits betweem £5,435 a year and £40,040 a year. Profit in excess of the £40,040 mark are subject to Class 4 NIC at 1%.

Sole traders don't "pay" themselves anything. They take some or all of the profits that the business generates. Monies taken from the business by the sole trader are known as drawings. Tax and NIC are payable on the profits generated by the business irrespective of the level of drawings i.e. if the business makes a profit but no drawings are taken tax / NIC is still payable.

From your post Cube you have invoiced / generated revenue of £13,000. From this £13k you need to deduct all the allowable expenses, including any capital allowances claimed. The allowable expenses do not include monies taken for yourself (drawings). This should leave you with a profit figure. From this profit figure you calculate any taxes and NICs due.

Regards.

David.

[dp0848]

Cube,

You say you "purchased" a Kangoo van. Do you actually own the van e.g. paid for it out right using your own cash or a loan from a bank, or did you buy it on some type of finance scheme? If it is the former then you can claim capital allowances if it is the latter then it is likely that the van is not owned by you but owned by a finance company. In this case you would not be able to claim capital allowances but can put the finance costs against your profits. Also, don't forget to post an adjustment to you accounts to allow for any private use of the van.

Regards.

David.

[CassioAcc]

Yes - I mean't 8% - Thanks dp0848 !!

[koicarpentry]

Cube,

Bear in mind that you for 2008/2009 Tax Year you wont have to compete the the Tax return until 31 October 2009 (Filed by Paper) or 31 January 2010 ( Filed online ), I'm not sure of the exact date for Paying your tax bill but that will be after this.

So if this is not your normal Cashflow situation and you are just clearing a backlog of bills you should be fine. Just make sure you start saving a percentage of your profits to pay your bill. ( you can work out the percentage from the previous posts )

[taxattack]

Cube

A few points:

Are you claiming working tax credit? If aged 25 or over, and working 30+ hours you are probably eligible. (I'm assuming you don't have a child or a disability - if so you can claim when younger and working less hours). Best apply immediately - claims can only be backdated 3 months from date of claim.

The van is allowable against tax (subject to dp0848's comment). The amount available to claim depends on when it was bought, and the date you choose for your year end.

The tax-free personal allowance for 08-09 is £6035 (HMRC website Rates and Allowances page not yet updated); NI starts at £5035.

The income "pending" counts as earned in the period, even if unpaid at the end of the period. However the period itself is to some extent a matter of choice. You don't have to prepare accounts to coincide with the tax year. You say you started March 2008, so a portion of your earnings so far will be in 07-08 (and taxed along with your other income for that year), the rest in 08-09. You therefore have some flexibility in when your sole trader income is taxed.

In short, there is quite some scope for allocating income and capital allowances in the most tax-efficient manner.

Feel free to pm me if you wish.

Chris