Tax Advice Please

JayCee

I am planning to start a small sole trader business, which will require £60,000 to set up. It will be financed by a £20,000 Business Loan from the Bank and £40,000 which is coming from a savings account in my husbands name only.

I expect to make a profit of approx £1,000 per month, which I plan to pay myself (on top of my wages from my current job).

My question is: Will I have to pay Income Tax on the £1,000 which I pay myself each month, or can I claim that it is a repayment of a loan which hubby has given to the Business, to start it up and if so, would that escape Income Tax?

Hope that makes sense.

Thanks.

fengirl_2

You pay tax on your profit. The loan repayments to your husband will not be allowable for tax, although if you are paying interest, then the interest will be allowable (although he will pay tax on it), as will the interest payable on the bank loan. Capital repayments are reflected in the balance sheet.

JayCee

Thanks Fengirl.

Apologies for my stupidity, as I have no business experience (which is frightening).:eek: I'm not too sure what you mean by 'allowable for tax'.

Am I correct in thinking that if the business makes £1,000 a month profit, after overheads and Bank Loan, then I give that £1,000 a month to my husband, as repayment of his loan to the business, then the business would only be breaking even and there would be no tax to pay for anyone.

I don't think he wants any interest on his loan to the business and I appreciate that I could only do this for 40 months, till he has been repayed his £40k.

Thanks

RayWolfe

No. The loan and it's repayment are capital. If you repaid 1K a month that would not affect the profit or loss.

CLAPTON

the bank loan is NOt itself an allowable expense against your profit ... only the interest can be offset against your profit.

JayCee

Thanks folks,

Think I've got it now.

If I put the £1,000 a month through as wages, I'll pay Income Tax on it.

If I put it through as a Capital Loan Repayment, the Business would pay Tax on it, as it would be included in the profit.

I think Income Tax is 22%, but I don't know what rate the Business's profit is taxed at, so is either of the above options better for me, or would they work out the same?

Thanks again for everyone's patience.

CLAPTON

No

if you are a sole trader then there is no such thing as wages for yourself... you can take a little or as much and that doesn't affect the tax.

the tax is based on your profit
i.e. turnover less allowable expenses

expenses include the loan interest but NOT the capital element (so you will need to get a statement of interest each year from your loan provider)
and what you take for your personal expenses have nothing to do with it.

pelirocco

CLAPTON wrote: »

No

if you are a sole trader then there is no such thing as wages for yourself... you can take a little or as much and that doesn't affect the tax.

the tax is based on your profit
i.e. turnover less allowable expenses

expenses include the loan interest but NOT the capital element (so you will need to get a statement of interest each year from your loan provider)
and what you take for your personal expenses have nothing to do with it.

She will be liable for PAYE tho ?

JayCee

Thanks Clapton,

I've been looking at this from the wrong side.

I wrongly assumed that anything that I took from the business would be classed as wages to me and liable to Income Tax and the Business's profits would be calculated after taking my wages into account.

Thanks for clearing it up.

I was told, because I won't have any employees, it's very simple and I won't need an accountant. All I have to do, is keep a note of Income, Expenditure and fill in a Tax Return, but it's starting to look a bit more complicated, if I plan to take some of the profits for myself. LOL

Rolo_Tomasi

The tax treatment will differ depending on whether you trade as a sole trader, partnership or Limited company and you should really give some thought to your trading entity before you start.

If you are a sole trader or partnership, you will pay tax on the profit of the business at your normal rate (20% or 40%) irrespective on whether you draw this profit out (for whatever reason). There is also a national insurance charge of 8% of profits over £5715pa.

You could form a Ltd Company and then the investment in this could be treated as a loan which can be repaid without any tax due on it. However the company would still have to pay tax on its profit (at 21%) but there is no nic to pay.

CLAPTON

pelirocco wrote: »

She will be liable for PAYE tho ?

no, sole traders don't pay PAYE, they pay tax on their profit

so if e.g.

turnover 50,000 pa

interest on loan 2,000
cost of sales 25,000
misc expenses..phone, stationery electicity etc say 3,000

so profit = 50,000-2,000-25,000-3,000 = 20,000

so she pays tax based on the 20,000 profit
i.e 20,000 - 6475 (personal allowance ) = 13,525
tax is 20% = 2,705
also some NI contributions (I've not got the exact details to hand ) but lets say about 1,300

so she has to spend or do what she likes
20,000 - 2,705-1,300 = 15,995