rs125 said:
Hi all..
Ive set up a new business ( *sole trader not a limited company* ) and have a quick question/query that i hope someone will be able to help me with..
Right here goes..
I have 2 bank accounts.One is my business account and the other my personal account.
All the money i earn i pay in to my business account..
Now each month i just transfer x amount across to my personal account and call it my wages.
Now because im a sole trader do i just pay tax on the amount i pay myself or do i have to pay tax on the amount that i leave in my business account?.
So far as the taxman is concerned, there is no distinction between earnings based on which account they're paid into, and you aren't taxed on the basis of bank balance, but on net profits.
It works something like this :-
Revenue
Sales £x
Cost of sales £y
Gross Profit £x-y
Expenses
Travel £exp1
Rent £exp2
Electricity £exp3
Stationery £exp4
Total Expenses £E = sum(exp1 : exp4)
Net Profit = Gross Profit - Expenses = £x-y - £E
So, you'll add up all your
business income for the trading year (regardless of what account you paid it into, or left it in, then deduct the cost of the items you sold (assuming you sold goods not services), then deduct your
business expenses, to end up with profit subject to tax.
That figure will go on your income tax return as income from self-employment.
But, in order to get to the tax you'll actually pay, there's a range of other things to take into account. If you bought capital items for the business (computer, office furniture, fax machine, etc), YOU own those items, so you can't claim depreciation against them as a limited company would, but you do get some capital allowances against your income tax. So, they don't change your profit figure, but they do go on the tax return and change the tax you pay. Other things that change the tax you pay will include earnings from other sources (such as employment, share dividends, pensions, property, foreign investments (subject to double tax provisions) and so on.
Trading as a limited company
might make good tax sense. Much will depend on your figures and circumstances. But, running a limited company has other implications too. For a start, as a company director you're subject to the provisions of several bits of company law, and there are several hundred criminal offences only a director can commit. So you need to watch your step. Secondly, there's quite a bit more bureacracy and form-filling, both for Companies House (annual returns, etc) and the Inland Revenue (monthly PAYE/NI returns, annual Corporation Tax return, etc), so you'll either need to buckle down to learning about this stuff or, more likely if the business is doing well enough to justify going limited, pay someone to do it for you. Then there's the filing fees for the above, though they're trivial.
And, of course, you change your legal status if you go limited. Where will the company registered office be? Did you realise you'd have a legal obligation to display a plaque outside such company premises? Who's the company secretary (because a limited company requires either two directors, or a director and a different company secretary, as a minimum requirement), and so on.
Before you go limited, you'd be well-advised to consult an accountant, at a minimum.
