Self employed salary! Confused on payments!

luckylucy1977

Hi all,

Hope you are all good.
I’m new to self employment this year and haven’t earns a huge amount and it’s been very straight forward if I have earnt this and paid out this in expenses.

I spoke to an accountant and since my turnover was fairly small I could actually submit my returns myself on a cash basis to save some money as it was simply and next year actually have an account as there will be lots of other things to take into consideration then.

I don’t want to keep asking him questions and have tried to Google but just wanted to see if anyone has any answers as don’t want to get caught by the tax man. 

So i am okay submitting the return, my books are all done apart from next month and ready to submit so have no issues with that.

My issue is salary! I have been told my salary can be my profits. So if my profits were £20k then that is my salary. Is this true? Would I just pay tax and NI on that £20k? 

If I was applying for anything, and my profit would as £20k would I put that my income is £20k?

Do I have to pay any other tax and NI on that £20k if it was my salary. So should I be paying tax and NI like as if I was employed and then tax again on my profit?

I am aware I can take a drawing as well. Just say I took £2k each month. Would I pay tax and NI on that I would I still just pay tax and NI at the end of the year and include that £2k per month into my profit?

apologies for all the questions. I have been told basically that whatever I earn as profit is mine and as long as I pay tax and NI on the profit then it’s fine and that is my salary. It just seems strange that the tax and NI I would pay on the profit is significantly lower than what I would pay if I was employed.

I just don’t want to have £20k profit, pay tax and NI on that profit and say that is my salary and have HMRC chasing me for unpaid tax from employment.

I really hope that made sense and haven’t made you all want a stiff drink

Grumpy_chap

The first question is are you self employed sole-trader or do you have your own Ltd Co. of which you are Shareholder / Director?

luckylucy1977 said:

Hi all,

Hope you are all good.
I’m new to self employment this year and haven’t earns a huge amount and it’s been very straight forward if I have earnt this and paid out this in expenses.

I spoke to an accountant and since my turnover was fairly small I could actually submit my returns myself on a cash basis to save some money as it was simply and next year actually have an account as there will be lots of other things to take into consideration then.

I don’t want to keep asking him questions and have tried to Google but just wanted to see if anyone has any answers as don’t want to get caught by the tax man. 

So i am okay submitting the return, my books are all done apart from next month and ready to submit so have no issues with that.

My issue is salary! I have been told my salary can be my profits. So if my profits were £20k then that is my salary. Is this true? Would I just pay tax and NI on that £20k? 

If I was applying for anything, and my profit would as £20k would I put that my income is £20k?

Do I have to pay any other tax and NI on that £20k if it was my salary. So should I be paying tax and NI like as if I was employed and then tax again on my profit?

I am aware I can take a drawing as well. Just say I took £2k each month. Would I pay tax and NI on that I would I still just pay tax and NI at the end of the year and include that £2k per month into my profit?

apologies for all the questions. I have been told basically that whatever I earn as profit is mine and as long as I pay tax and NI on the profit then it’s fine and that is my salary. It just seems strange that the tax and NI I would pay on the profit is significantly lower than what I would pay if I was employed.

I just don’t want to have £20k profit, pay tax and NI on that profit and say that is my salary and have HMRC chasing me for unpaid tax from employment.

I really hope that made sense and haven’t made you all want a stiff drink

BoGoF

Go back and get your accountant to do it. May sound harsh, but you have no clue what you are doing.

Veteransaver

Assuming you are actually self employed and not running a limited company then you just fill in a self assessment form.
You need to add up all income in that tax year ie 6th April to 5th April. Enter that as your income.
Then in the expenses box enter your total expenses for that year.
That is your profit and you are taxed on that.
Drawings, Eg £2000 a month are irrelevant for that. You just need to declare your profit and pay the tax and Ni that it calculates for you. And also likely make a payment on account too, it will tell you this too.
If you are a limited company then you should get an accountant to sort all this out as it is a lot more complex.

Marcon

luckylucy1977 said:

I spoke to an accountant and since my turnover was fairly small I could actually submit my returns myself on a cash basis to save some money as it was simply and next year actually have an account as there will be lots of other things to take into consideration then.

I don’t want to keep asking him questions and have tried to Google but just wanted to see if anyone has any answers as don’t want to get caught by the tax man. 

So i am okay submitting the return, my books are all done apart from next month and ready to submit so have no issues with that.

My issue is salary! I have been told my salary can be my profits. So if my profits were £20k then that is my salary. Is this true? Would I just pay tax and NI on that £20k? 

If I was applying for anything, and my profit would as £20k would I put that my income is £20k?

Do I have to pay any other tax and NI on that £20k if it was my salary. So should I be paying tax and NI like as if I was employed and then tax again on my profit?

I am aware I can take a drawing as well. Just say I took £2k each month. Would I pay tax and NI on that I would I still just pay tax and NI at the end of the year and include that £2k per month into my profit?

apologies for all the questions. I have been told basically that whatever I earn as profit is mine and as long as I pay tax and NI on the profit then it’s fine and that is my salary. It just seems strange that the tax and NI I would pay on the profit is significantly lower than what I would pay if I was employed.

I just don’t want to have £20k profit, pay tax and NI on that profit and say that is my salary and have HMRC chasing me for unpaid tax from employment.

I really hope that made sense and haven’t made you all want a stiff drink

Please get yourself some proper professional advice to ensure everything kicks off correctly. Your post indicates you are very confused (join a great many people when they first become self employed!), and there's a real possibility you're storing up problems which will come back and haunt you. You either have drawings (if you are self employed); or you have a salary + dividends (if you are running your own limited company and are an employee of that company). 

Try reading https://www.gov.uk/browse/business and then have another chat with your accountant - before you submit anything.

luckylucy1977

Thank you all. I am a sole trader.

My profit is only a small amount. Not £20k, used that as an example. 

I know how to submit my accounts and book keeping is all up to date with incomings and outgoings.

The accountant suggested to submit myself this year on a cash basis due to the fees it would cost for them to do the assessments and the fact I don’t have any complex expenditures or anywhere to ‘lose’ money this year. I will need an accountant next year.

My question was just to understand whether I can use my profit as my salary and if I just pay the tax and NI on that profit and nothing else. Like I don’t have to pay tax and NI on my profit and then tax and NI again if I was take to a salary from that profit. The internet is confusing me saying if I pay myself a salary then I need to be PAYE which would mean I am paying tax and NI twice.

I have tried to speak to him but he is only holiday now until mid April so just wanted some answers in the mean time.

Marcon

luckylucy1977 said:

Thank you all. I am a sole trader.

My profit is only a small amount. Not £20k, used that as an example. 

I know how to submit my accounts and book keeping is all up to date with incomings and outgoings.

The accountant suggested to submit myself this year on a cash basis due to the fees it would cost for them to do the assessments and the fact I don’t have any complex expenditures or anywhere to ‘lose’ money this year. I will need an accountant next year.

My question was just to understand whether I can use my profit as my salary and if I just pay the tax and NI on that profit and nothing else. Like I don’t have to pay tax and NI on my profit and then tax and NI again if I was take to a salary from that profit. The internet is confusing me saying if I pay myself a salary then I need to be PAYE which would mean I am paying tax and NI twice.

That's where your confusion is creeping in. It applies where someone operates via their own limited company, in which case the limited company is the employer and needs to be registered for PAYE. 

If you're truly self employed you don't actually have an employer and strictly speaking you don't pay yourself a salary (although people frequently, and incorrectly, refer to doing just that). Your net profits are your 'earned income' and you pay tax, and possibly NI, on those - just once, via self assessment. 'Drawings' are the lumps of cash you take out of the business as the year progresses - and yes, you do need to keep a record of those, because they are part of your earnings from the business (ie your earned income), not a business expense as some optimistically believe.

 

baser999

@ Veteransaver gave the best explanation - basically being self-employed you’ll pay tax and NIC on your profits being gross fees received less allowable expenditure. It doesn’t matter how much of those fees you draw out in your year, draw it all out if you want, you’ll still only pay tax and NIC on the profit. 

Grumpy_chap

I still think the OP would be prudent to engage the services of the Accountant.  Ideally to prepare the SA return, or to review the return prepared by the OP prior to submission.  Given the OP states they have simple accounts and up to date, it should not take an Accountant long to undertake this task so the fee should be modest.  If the current Accountant is not obliging, maybe that firm is not geared up for supporting very small business operations and another firm would be better suited.

The OP has some confusion in how things work, so this review by an Accountant would give peace-of-mind even if nothing else.

General_Grant

baser999 said:

@ Veteransaver gave the best explanation - basically being self-employed you’ll pay tax and NIC on your profits being gross fees received less allowable expenditure. It doesn’t matter how much of those fees you draw out in your year, draw it all out if you want, you’ll still only pay tax and NIC on the profit. 

And, to emphasise what baser999 says, even if you don't take the profit out of your bank account, it is still your income.

DullGreyGuy

There is no salary as a sole trader... you have a profit, you are taxed on your profit. If you want to think in employee terms then your profit is roughly equivalent to your salary but it's better to not draw parallels as it's all simply different. 

As a sole trader you and the business is legally the same thing, you dont get a choice on what proportion of your profit you pay tax on because its all just you. Were you to incorporate then the company would pay corporation tax on the whole profit but you'd have a choice how much you extract and so your personal tax would be dependent on that.