Sorry...tax credits self employed confusion

Icequeen99

bitconfused2012 wrote: »

So whats drawings then? Just out of curiousity! Profit or other income or not?

Drawings are nothing as far as tax/tax credits are concerned. Drawings are money that is taken out of the business by the owner. If you are self-employed (i.e. not a LTD company) then drawings are ignored when working out tax - they are not an expense.

You work out your income - allowable expenses - capital allowances.

If you have taken drawings, you will have been taking the income that has come into the business. What you do with it once it has come in is really just up to you.

You are just drawing on your own net profits which are already subject to tax using the formula above.

It is amazing how many newly self-employed think drawings can be put down as an expense when working out tax. If you think about it though, if you could just take money out and spend it and deduct it for tax, everyone would do that so they could avoid tax!

IQ

tyllwyd

So your partner's business made a profit of £15K last year. Even leaving aside the purchases he made which gave rise to the capital allowances, you have said that he took £24K out of the business. So where on earth did he come up with the extra £9K? Is he running up the business overdraft?

BigAunty

tyllwyd wrote: »

So your partner's business made a profit of £15K last year. Even leaving aside the purchases he made which gave rise to the capital allowances, you have said that he took £24K out of the business. So where on earth did he come up with the extra £9K? Is he running up the business overdraft?

Obviously I can't speak for the OP but my partner is self employed, has always generously rounded up the tax due.

Over 10 years quite a surplus built up, and then once took a massive dividend out of the company account.

Not all company directors draw out every penny in the business bank account every year.

Icequeen99

BigAunty wrote: »

Obviously I can't speak for the OP but my partner is self employed, has always generously rounded up the tax due.

Over 10 years quite a surplus built up, and then once took a massive dividend out of the company account.

Not all company directors draw out every penny in the business bank account every year.

But that is a different situation because your partner has a company and so the company money is separate to his money and he takes dividends (which he is taxed on) or a wage (which he would be taxed on and which would be an expense) or can choose to leave money in the company.

We are talking here about self-employed sole trader/partnership so it is different. A surplus doesn't build up in the same way. But it is still possible to take drawings and end up with a loss for tax purposes. Or maybe the 24,000 is just profit that he didn't take out last year.

IQ

IQ

Sixer

It's entirely possible to take more in drawings than total profit. It simply means the health of the business overall will be less than it would have been.

For example, people could extend cash flow from 30 to 60 days for supplier bills. If their business requires a stockholding, this could be reduced. Large capital expenses. All manner of other things could happen which mean a self-employed person takes more in drawings than the sum of the profit they made.

bitconfused2012

Hi all, i didnt mean to cause a dispute! We dont tax dodge! Our accountant is excellent. Its me that isnt very with it!

My partner is a sole trader, he put an extra £8000 into the business on a loan as cashflow from people has been terrible! Our cash in hand is always so minimal and we literally live week by week as he is owed alot of money!

tyllwyd

Sorry, I didn't mean you to think I was accusing you of fiddling the books. What I was trying to say was that just on what you'd said in this thread, there seemed to be more money coming out than going in, which obviously can't go on forever, but hopefully there's more to it than that and it's all fine.