Sole Trader Wages - (Drawings) - Am I taxed on what I take out for my wage?

[MJOMusic]

Hi all,

I'm currently starting up as a sole trader and I have pretty much everything in place. I have purchased accounting software to help with my accounts and I understand that I am taxed on what I earn - minus expenses.

Anyway my question is this - say my company earned £5,000 and I set aside 30% for tax and NI contributions (to be safe), would I be able to transfer the £3500 to my personal account, file it as drawings, and not pay extra tax on the money transferred?

I have been told contrasting things regarding this - I want to be in control of my own accounts and this is the only area where I am struggling.

Any feedback would be greatly appreciated ,

Thanks

 

[chalkie99]

If you are a sole trader you do not have a company - you ARE the business.

You pay tax and NI on your total profits, i.e. income after expenses. what you decide to spend as "wages" is irrelevant.

Do you have any other form of income as £5k is not a great deal?

Tax will depend if you have earnings elsewhere.

 

[MJOMusic]

Hi there,

Thanks for the reply

I see - so any money that comes in is mine after tax and expenses.

I don't have any other form of income - £5,000 was just an example figure. I've just graduated and am trying to pursue a career working for myself and getting use out of my degree. I've done work for free for people before but now offers of money have started coming in and I'm just making sure I have everything covered.

Thanks again - good to hear some good advice!

 

[Matthew_28]

Hi,

I think I can help as others have helped me previously.

I am also a Sole Trader (self employed). I am currently in the process of putting my tax return and accounts together.

I did exactly the same as you by setting aside 30% to allow for the Income Tax and NIC's and I've found 30% is plenty (at least in my circumstances). Also if you run your car for business use (from April 2011) you can claim 45p per business mile up to 10,000 miles and 25p thereafter.

You are taxed on your net profit after allowable business expenses for example. Net profit is classed as your wage once you have deducted any allowable business expenses. Remember, don't draw too much, but if you work on the 30% rule you should be okay and may have a bit left over to pay an accountant at the end of it lol.

Total Sales say = £35,000.00

(Allowable) Business Expenses say = £10,000.00

Taxable Income = £25,000.00 (less tax free amount e.g. £7475, then taxed as per HMRC rates)

I think that's right.

Cheers
Matt

 

[MJOMusic]

Excellent - really clearing this up for me

One more question - as a computer is a fixed asset, will the sum of the purchase count as an expense? I'm just getting to grips with my software here and it is explaining to me that fixed assets such as computers are not subtracted from the gross profit.

Thanks,

 

[Matthew_28]

Excellent - really clearing this up for me

One more question - as a computer is a fixed asset, will the sum of the purchase count as an expense? I'm just getting to grips with my software here and it is explaining to me that fixed assets such as computers are not subtracted from the gross profit.

Thanks,

Hi,

I am not an accountant so someone will probably correct me but I'm not sure that a computer or laptop is classed as a "fixed" asset any more, given depreciation and that they can soon become outdated nowadays, I'm not sure if it should be classed as a "variable" asset that depreciates...and would (in a relatively short space of time, say a few years) need replacing?

But that aside, if the computer is for the sole use of the business then yes I would class that as a business expense but we could be crossing over here into capital allowances which i'm not too sure about but i think you get a set amount in the first year when starting up for capital allowances.

I'm sure someone more qualified / knowledgeable than me will be along shortly to provide a more precise answer.

Regards
Matt

 

[MJOMusic]

Hi,

Yes the computer will be for sole use of the business - I'm currently working on an underpowered machine which will soon be outdated for what I need it for, so I'm looking to upgrade.

Thanks for the insight - I'm looking into purchasing a lot of hardware for the business - desk, speakers, peripherals. I was hoping that these would be covered as a business expense. I wonder if anyone else could shed some light?

Thanks for your help Matthew_28

 

[Bobb1979]

The 30% put to one side is exactly what I have been doing with our business as we are self employed ( partnership ) too.

Having a helpful accountant really pays, I am glad to not have to take time out from my day to day work for all the paperwork on this side and they have helped us keep up to date with everything.

 

[Truemanbrown]

A few pieces of advice:-

• The new equipment that you are purchashing will be classed as 'Fixed Assets'. However, you will be able to claim Annual Investment Allowance on the purchase in the year of purchase;

• Be aware that if you started trading today then your first tax liability will be payable on 31st January 2013. That payment will consist of the following:-
  • your self assessment tax liability for 2011/12;
  • if you tax liability for 2011/12 is greater than £1,000 you will have to make a payment on account of your tax liability for 2012/13. This is normally 50% of your 2011/12 liability but you can make a claim to reduce if you know that the 2012/13 liability will be lower than 2011/12. If you do have to make a payment on account, then a further payment on account (for the same amount) is payable on 31st July 2013.

• If your business is being run from home do not forget to make a claim for use of home as office.

 

[Laura Hall]

Hello i am also experiencing some confusion, say i am a sole trader, i have one employee one sub-contractor, are there wages classed as expenses? how does it work? Sorry if i sound stupid, does anyone have a list at all oh what are the set expenses? Say i earn £45000.00 in a year do i just work out my tax as taking away the 20% or do i deduct wages, expenses then see what i am left with? Many Thanks

 

[STDFR33]

Staff wages and subcontractor costs are generally both tax deductible.

 

[Scalloway]

Allowable expenses

https://www.gov.uk/government/publi...-calculate-your-taxable-profits-2016#expenses

 

[SteveHa]

Wow, 6 years between one post and the next.

 

[STDFR33]

Wow, 6 years between one post and the next.

Taking a leaf out of Awebs book.

 

[SteveHa]

It does seem that way.