Self employed tax on drawings help

chihuahua3

Hello.

I am self employed. I own a shop.
I don't take much money out of the shop for myself, it's a new business, my partner makes enough money to sort us out each month, I just take the odd bit now and then, I am putting a lot of money back into my business, advertising etc...

Anyway,
What I would like to know is, how much can i take out as drawings, before I have to pay the tax on it?

I put 20% of everything I take as drawings into a savings account. Last year, I only took around £1000, so the £200 I had put aside for the tax bill, I was informed that I could take out of savings and spent on what I please.

I know when your employed you earn upto a certain amount before getting taxed (e.g. £6400) , is there a set amount for self employed people on their 'drawings' too?

Thanks for taking the time to read this.

POPPYOSCAR

It does not work that way.

You will pay tax on your profits not what you actually draw from the business.

For example you could not pay yourself anything at all on a regular basis
you will still pay tax based on the profit shown on your accounts.

You will pay tax based on exactly the same tax allowances as someone who is employed. Your nat. ins. will be different though.

Pennywise

Assuming you're not running the shop as a limited company, you pay tax on the business profits, not on the amount you draw out of it, so you can draw nothing at all and still have a tax/nic bill to pay.

Taxable profits is basically sales income, less allowable expenses and less capital allowances on equipment/vehicle purchases, adjusted for stock movements in the year, and also adjusted for accruals and prepayments.

You need to prepare accounts, under the generally accepted accountancy principles, which gives you a profit figure, which is the basis for your tax return declarations.

The amount you draw doesn't come into the equation.

chihuahua3

Aaaahhh thank you! =D

InsideInsurance

If you are running it as a limited company though then matters are different and your personal tax is based on your drawings but the corporation tax is based on the taxable profit

POPPYOSCAR

InsideInsurance wrote: »

If you are running it as a limited company though then matters are different and your personal tax is based on your drawings but the corporation tax is based on the taxable profit

You are not 'self-employed' in those circumstances you are an 'employee' of the company.

If you are in a 'partnership' you are 'self-employed'.

BettySpofkins

InsideInsurance wrote: »

If you are running it as a limited company though then matters are different and your personal tax is based on your drawings but the corporation tax is based on the taxable profit

I'm actually just starting up myself, so have a lot of questions, and this reminds me of one of them.

If a Ltd complany makes some money - say £1,000 per month - corporation tax takes 20% of that, I believe. Surely then if the company owner then pays themself the £800 in dividends, that's further taxed at 20% too, leaving not much? So what is the benefit of doing it this way rather than just being self employed and paying standard income tax?

spadoosh

You dont pay 20% on dividends. As well as not paying as much/any national insurance.
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnSavingsAndInvestments/DG_4016453

BettySpofkins

Thanks, that's a useful page. I see how it's different to how I understood it (and I use the word "understood" quite loosely!), but I think my question still stands. For example:

Income under 35k: corporation tax is 20%, and tax on dividends is effectively 0%, so I've paid 20%
Income over 35k: corporation tax is 20%, and tax on dividends is efffectively 25%, so I pay over 40% on that chunk.

These rates are almost identical to standard income tax, if not higher. Plus you have the costs involved with accountants etc. Where is the benefit of doing it this way?

Pennywise

BettySpofkins wrote: »

Where is the benefit of doing it this way?

National insurance. On profit of £35k, you'd pay £2.6k of national insurance if self employed but zero if paid via limited company dividends.

For a H/R taxpayer, you also have the option of not taking all the dividend and letting it build up for later years, thus avoiding the 25% HR tax in the year it's earned. You could either take it as capital in a later year (10% tax) or draw it down over several years as dividends within the BR band, i.e. as a retirement income or in years where profits were lower.

Mistral001

BettySpofkins wrote: »

Thanks, that's a useful page. I see how it's different to how I understood it (and I use the word "understood" quite loosely!), but I think my question still stands. For example:

Income under 35k: corporation tax is 20%, and tax on dividends is effectively 0%, so I've paid 20%
Income over 35k: corporation tax is 20%, and tax on dividends is efffectively 25%, so I pay over 40% on that chunk.

These rates are almost identical to standard income tax, if not higher. Plus you have the costs involved with accountants etc. Where is the benefit of doing it this way?

I am trying to figure this out as well. I have been told several times on this forum that being Ltd has several tax advantages and gradually am working them out for myself - very gradually - I suppose people who know generally keep the information to themselves.

The link that spadoosh gave says that tax on dividends is 10% where they are below £35,000. This seems very advantageous, since income tax rate is 20%. Also between £35,000 and £150,000 tax on dividends is 32% rather than income tax rate of 40%, so still advantageous. Corporation tax for for profits below £300,000 is still 20%. I know that will be tax paid on profit kept within the company and not taken out by the owner for personal use so it is not really a tax on income. However, it looks like you win whichever way by going Ltd from a tax point of view (however, there are very big on non-tax-related downsides).