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Employed + sole trader taxes?

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John_Q

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Oct 26, 2022
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I'm full time employed and have started selling items on eBay which I build. Yearly turnover is around £5000 with a profit on £2000. (After subtracting various expenses,raw materials, eBay fees, postage etc)

I have registered as a sole trader and now need to complete the self assessment.

I've been reading up on taxes and sole traders and still have a few queries.

In my full time employment my tax rate is the upper rate, so 40%. From what I understand any profits I make as a sole trader will be on top of my full time employment, so they will be taxed at 40% :( (At this rate it's hardly worth my time selling anything)

As a sole trader you don't pay yourself a salary but rather drawings are taken, which will then reduce your profit, so then less tax paid.

Am I allowed to take drawings each month as a 'salary', and no tax is paid on this? I've read up on drawings from a few web sites but am still unclear on this?

Why would a sole trader then not take all the profits as drawings and then not have to pay any tax?
 
Welcome to the UKBF there are several accountants here who I am sure will be along before the night is out to point you in the right direction. Best of luck with your new venture
 
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I'm stll unclear on that. You pay tax on your profits at the end of the year. If you take drawings during the year this would reduce your profits? Or are you saying I need to pay tax on the drawings as well?

What other options do i have of paying less tax as it seems crazy to pay 40% on any eBay profits just because I'm in the 40% tax band.
 
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Thanks for clearing that up. Time to increase the selling price I guess otherwise its not worth my time.
 
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John_Q said:
I'm stll unclear on that. You pay tax on your profits at the end of the year. If you take drawings during the year this would reduce your profits? Or are you saying I need to pay tax on the drawings as well?

What other options do i have of paying less tax as it seems crazy to pay 40% on any eBay profits just because I'm in the 40% tax band.
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drawings do not reduce profit. drawings are merely you taking your own money out of the business. if you're not actually running the ebay sales business through a separate business account then essentially you have already drawn all the profit as it is earned.

why does it seem crazy to pay tax at additional money you earn at your marginal rate (40%)?
 
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John_Q said:
As a sole trader you don't pay yourself a salary but rather drawings are taken, which will then reduce your profit, so then less tax paid.
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No. As a sole trader you pay tax on all of your sole trader income minus your allowable expenses. Drawings are neither allowable nor an expense.
 
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HFE Signs said:
Other option is to spend more of the money on things you need for the business to reduce profits
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Consider this - you either pay a chunk of your profit to the government or you pay it to someone else to avoid paying it to the government. Either way your cash is gone.

WaveJumper said:
Is worth considering setting up a LTD and keeping it totally separate, any thoughts people?
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Not worth it on those figures to be honest and any extraction would still be taxed at higher rates plus corporation tax and further admin in the mix.
 
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WaveJumper said:
Is worth considering setting up a LTD and keeping it totally separate, any thoughts people?
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I would say not yet, at the figures mentioned it wouldn’t warrant the additional accounting costs
 
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NicoJ said:
Consider this - you either pay a chunk of your profit to the government or you pay it to someone else to avoid paying it to the government. Either way your cash is gone.
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But you gain whatever you’ve paid for
 
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Another thing to consider is to do less. There is no tax if the profit from your business is less than £1000.

£2000 profit means at least £800 tax, so is it work doing the extra to be only £200 better off?
 
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pentel said:
Another thing to consider is to do less. There is no tax if the profit from your business is less than £1000.

£2000 profit means at least £800 tax, so is it work doing the extra to be only £200 better off?
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Not true. The trading allowance of £1,000 applies to gross income (sales) not profit.
 
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NicoJ said:
Yes, that's true but you have no cash in your pocket. What's the point in being in business if you have nothing to show for it?
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How, for instance, does investing in a new piece of efficient machinery for £20k translate to ‘nothing to show for it’?

And how does ‘cash in your pocket’ which is currently losing circa 15% p/a make more sense?

Just curious…
 
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simon field said:
How, for instance, does investing in a new piece of efficient machinery for £20k translate to ‘nothing to show for it’?

And how does ‘cash in your pocket’ which is currently losing circa 15% p/a make more sense?

Just curious…
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Because spending £20k to save less than £1k makes sense?? If the machine is used to increase sales then the tax is just being deferred to a later year (when it might cost the individual more or less, nobody has a crystal ball).

In my opinion we need to get away from the idea that avoiding paying tax is always the better option. Sometimes it is, sometimes you should accept that paying tax is just an indicator that you are doing well.

Cash in your pocket can be used on other things rather than "losing" anything. There's always a different angle.
 
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John_Q said:
I understand any profits I make as a sole trader will be on top of my full time employment
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Some people would be really happy to make £1200 on £5k sales!

If your expenses go up, your profit goes down, as does your tax bill!
 
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John_Q said:
I'm full time employed and have started selling items on eBay which I build. Yearly turnover is around £5000 with a profit on £2000. (After subtracting various expenses,raw materials, eBay fees, postage etc)

I have registered as a sole trader and now need to complete the self assessment.

I've been reading up on taxes and sole traders and still have a few queries.

In my full time employment my tax rate is the upper rate, so 40%. From what I understand any profits I make as a sole trader will be on top of my full time employment, so they will be taxed at 40% :( (At this rate it's hardly worth my time selling anything)

As a sole trader you don't pay yourself a salary but rather drawings are taken, which will then reduce your profit, so then less tax paid.

Am I allowed to take drawings each month as a 'salary', and no tax is paid on this? I've read up on drawings from a few web sites but am still unclear on this?

Why would a sole trader then not take all the profits as drawings and then not have to pay any tax?
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HI john,

If you were to take a salary, which you can't as a sole trader, then you would still pay tax on the salary at 40%. Your only option to reduce the tax would be to set up a Ltd company (19%) and trade through that though moving to a LTD format will involve more paperwork/admin and cost. If you receive no other dividends, you would be able to take £2,000 dividend p.a. from the company tax free. If your eBay business grows a LTD may be worthwhile.

If you wanna know more do get in touch.

Andreas

www.chilledconsulting.com
[email protected]
 
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John_Q said:
After subtracting various expenses,raw materials, eBay fees, postage etc
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Paul Kelly ICHYB said:
If your expenses go up, your profit goes down, as does your tax bill!
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OP - are you sure you're claiming for all valid expenses that you're incurring at the moment (without buying anything else!) e.g. justifiable proportionate home costs (heating, storage, office space, broadband, security etc) that is being used for your sole trader work?
 
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WaveJumper said:
Is worth considering setting up a LTD and keeping it totally separate, any thoughts people?
Click to expand...

It's an option but the admin costs of trading via a limited company would probably exceed any tax savings.
 
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John_Q said:
....

What other options do i have of paying less tax as it seems crazy to pay 40% on any eBay profits just because I'm in the 40% tax band.
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Do you have a spouse who isn't using his/her personal allowance in full or paying tax at lower rates - you may be able to employ them in your business and pay them a salary.
 
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NicoJ said:
Because spending £20k to save less than £1k makes sense?? If the machine is used to increase sales then the tax is just being deferred to a later year (when it might cost the individual more or less, nobody has a crystal ball).

In my opinion we need to get away from the idea that avoiding paying tax is always the better option. Sometimes it is, sometimes you should accept that paying tax is just an indicator that you are doing well.

Cash in your pocket can be used on other things rather than "losing" anything. There's always a different angle.
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Your opinion is fine. I, however, am appalled by the amount of taxpayer money that our government squanders, so I’ll be the judge of where that money is best off, thanks.
 
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NicoJ said:
Yes, that's true but you have no cash in your pocket. What's the point in being in business if you have nothing to show for it?
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The original post was reference to taxable income, op has no issue with cash and if you spend the money then you do have something to show for it.
 
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simon field said:
Your opinion is fine. I, however, am appalled by the amount of taxpayer money that our government squanders, so I’ll be the judge of where that money is best off, thanks.
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It's not your money to decide what to do with though, it's the OP. That's the point, people automatically try to reduce tax but sometimes paying it is the better option.

HFE Signs said:
The original post was reference to taxable income, op has no issue with cash and if you spend the money then you do have something to show for it.
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You have no idea whether the OP has any issue with cash. And I agreed to the point about spending it......

There has been some useful suggestions on here on how to minimise the tax that the OP has to pay, its worth pointing out that if they are doing their tax return for 22 then not one of those ideas can be utilised now. Only for the future.
 
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NicoJ said:
There has been some useful suggestions on here on how to minimise the tax that the OP has to pay, its worth pointing out that if they are doing their tax return for 22 then not one of those ideas can be utilised now. Only for the future.
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If you mean the 21/22 year, due jan 23 online, then assuming the OP is working from home of course, 'real' incurred expenses such as home working cost *can* be utilised now - they may knock the tax back peanuts in comparison, but worth an extra pint at the end of the day:
www.gov.uk

Expenses if you're self-employed

Business expenses you can claim if you're self-employed
www.gov.uk www.gov.uk
 
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DefinitelyMaybeUK said:


If you mean the 21/22 year, due jan 23 online, then assuming the OP is working from home of course, 'real' incurred expenses such as home working cost *can* be utilised now - they may knock the tax back peanuts in comparison, but worth an extra pint at the end of the day:
www.gov.uk

Expenses if you're self-employed

Business expenses you can claim if you're self-employed
www.gov.uk www.gov.uk
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Yes you are quite right. My apologies, I only remembered the incorporation and wages advice.

Any legitimate expenses that were incurred can, of course, be included and will reduce any tax accordingly.
 
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