Self Employed: Purchasing things for work

henrygregory

Hi, I have recently started work self employed. I have three SLA's which has secured me guaranteed regular work for the next 12 months.
I am not VAT registered.
Will need to keep the numbers round in this example as I am not wonderful with maths.

If I take £20k per year from my self employed work and I need to pay aproximately 20% tax on what I earn.
If I choose to buy a £1000 computer which is solely for work purposes.
How much would I expect to have taken from my tax bill to compensate for this? I don't actually need a laptop, but just thinking ahead for any tools etc?

Any guidance on this would be perfect. Numbers are not actual, just round and easy to understand for me

WHA

Firstly, tax (and NI) is payable on business profits, not what you draw out. So assuming your business makes £20k profit, you pay 20% tax and 9% NIC on £20k less the annual allowances for tax/nic (which are different). If you make £25k profit, but only draw out £20k, you still pay tax/nic on £25k.

If you spend £1k on a computer used wholly for the business, then the profit reduces by £1k, so you pay tax and NIC on £19k instead. So a tax/nic saving of 29% or £290, so your £1k computer "costs you" £710 after tax/nic relief.

So certainly no point in buying stuff you don't actually need. Also remember that if you used the computer 50:50 between personal and business, you only get 50% relief, so it would cost you £855 after tax/nic relief.

Of course, if you are, say, on tax credits, a reduction in profits may mean more tax credits. I don't know the thresholds and percentages off the top of my head, but certainly a few years back, a profit reduction of £1,000 led to a tax credit increase of £370 (37%) at some income level, which would have given you a further £370 in your pocket, making overall "tax/nic/tax credit" relief of over 50% of your spending. But like I say, the rules have changed over time and I don't hear of this kind of benefit of tax credit much anymore.

Bantex_2

Allowance are differnt on capital goods and expenses.

sequence

Bantex wrote: »

Allowance are differnt on capital goods and expenses.

Isn't this different now with the new cash accounting rules ? I'm sure, but I heard that now providing you meet certain requirements you can use cash accounting, which is very simple to do. In the ops case it would be just paying tax on 19K if using cash accounting.

Pennywise

Bantex wrote: »

Allowance are differnt on capital goods and expenses.

For most small businesses, they can claim the full cost of capital spending against their profits in the year of purchase if they wish to, i.e. 100% AIA rules. So the effect is the same. And, as said above, if the business is a sole trader adopting the simplified cash accounting rules, then capital allowances don't exist and spending on capital is the same as spending on expenses.

henrygregory

Thanks very much for the helpful posts.

As an example. I already have an iPad which I purchased ready to use for work. I have not set it up yet for 3g, but it is one which will connect to the mobile network. I use this iPad solely for work to open, send and respond to emails from customers, respond, log and close support calls etc. I am happy to pay for the iPad myself and not claim, but was wondering if it would be worth me claiming the data allowance on it which would mean I could use it wherever. This would be similar to having a business phone line.
The nature of my work means that I am out and about and currently have to keep finding free wifi spots which is not helpful.

I will also be using my broadband line at home heavily, although this would not be solely for business use. ...if you hadn't guessed, I am in IT.