Sole trader & tax

Foolah

Hello,

I am currently looking to start an online shop and currently exploring all the questions I need asking. However, I can't fully work out the tax as some places on the internet have different information and answers to these questions. The main question is regarding wages and tax! Do you get taxed on the profits after you've paid yourself? Are your expenses your wage?

Turnover: £80,000
Expenses: £50,000
Wage: £20,000

Is the tax going to be on the £10,000 profit? etc?

Dazed_and_confused

If you were to only pay tax on the "profit" after a wage why wouldn't you pay yourself £30,000 and pay no tax?

But seriously, as a self employed person you don't have a "wage". You pay tax on £30,000 in the scenario you have outlined.

But you might find it cost effective to engage an accountant to assist. Someone friends, relatives or colleagues have used and are happy with is a good starting point.

Foolah

Dazed_and_confused wrote: »

If you were to only pay tax on the "profit" after a wage why wouldn't you pay yourself £30,000 and pay no tax?

But seriously, as a self employed person you don't have a "wage". You pay tax on £30,000 in the scenario you have outlined.

But you might find it cost effective to engage an accountant to assist. Someone friends, relatives or colleagues have used and are happy with is a good starting point.

So, after the tax, this is your wage?

I've been reading so much stuff, it's difficult to get my head round. Othe rplaces say that you need to pay yourself in drawings. Etc.

System

When you are a sole trader the profit from the business is your wage and you pay tax on it at normal income tax rates. Your wages are not a tax deductible expense to your business as a sole trader, that would only apply if you were operating as a Limited Company.

Turnover: £80,000
Expenses: £50,000
Wage: £20,000

Is the tax going to be on the £10,000 profit? etc?

In the above scenario

Turnover is £80,000 you have £50,000 of expenses so the remaining £30,000 is your wage and that is what is taxed as your personal taxable income no matter whether you pay yourself £10,000 out of it or the full £30,000.

The problem you're having is that you're reading advice for both operating as a sole trader and a limited company and getting it all mixed up. The two work differently. Sole trader is simple: Turnover - allowable expenses = your taxable income. Ltd Company is where all the more complicated stuff about paying yourself in dividends, as a drawing etc apply in order to try to minimise exposure to tax. With a Ltd Company the company gets a bill for tax, corporation tax, CAN count your wages as a tax deductible expense and you as an individual getting an income from that business pay income/dividend tax on that.

Genuineguy03

In addition to what's all ready been said. The first £11,500, for this tax year, is you personal allowance. So you only pay tax on every pound of profit above £11,500. So if your profit was £11,501 only £1 is taxable.

NeilCr

Genuineguy03 wrote: »

In addition to what's all ready been said. The first £11,500, for this tax year, is you personal allowance. So you only pay tax on every pound of profit above £11,500. So if your profit was £11,501 only £1 is taxable.

The personal allowance for 2018/2019 is £11,850 if that is what you are referring to

https://www.gov.uk/income-tax-rates

xapprenticex

forum is not a good place for tax info, accountants are not as expensive as you may think.

CakeCrusader

If I were you I'd get an accountant as any mistakes that you make will be costly. An accountant is a business expense by the way, so using one will reduce your tax bill.

Dox

Try this: https://www.gov.uk/browse/business

vegasvisitor

I would definitely seek advice from an accountant, as they could advise you of expenses that you can offset that you may not otherwise be aware of, thus reducing your tax bill. It might be that you can get their help partially or in the first year, and then you will be set to do your own books.

I agree with others though - you don't really have a 'wage'. The profit from the business is your income and is therefore what is taxable (with your allowance used first).

Pennywise

Starting point is to research the difference between a sole trader and a limited company. Once you fully understand that, you'll understand how information may appear conflicting but really isn't. Just remember it's not just "drawings" that are different, there are different rules also re timing of declaration (i.e cash versus accrual basis) and also as to the rules for claiming expenses. You really can't apply sole trader accounting/tax rules to a limited company nor vice versa.