Paying Tax If You Are Self-Employed


Are you a sole trader? Or, an individual member of a partnership?

Then you will likely be subject to income tax and possibly National Insurance on your earnings.

 Taxing Earnings Vs Monthly Drawings

Unfortunately, tax being taxing, earnings for tax purposes may not be the same as the monthly drawings you take from your business.

For example, you may decide to take no “wages” from your business in order to build up cash reserves. But if your business is profitable you will still pay tax.

Why Is This?

HMRC will largely ignore any drawings you take from your business when considering how much tax and NIC you are liable to pay. Instead, they will look at your profit for the relevant trading period.

How Much Tax Will You Pay?

Accordingly, if you want to judge how much you will be paying to HMRC, you will need to look at your business profit and loss account. And, not the amount of cash you have withdrawn to meet your private expenditure.

Looking to file a Self Assesment? Our team will calculate, complete and file your Self-Assessment Tax Return via the HMRC Government Gateway platform. Contact us today.

How HMRC Calculate Profit

As with all matters relating to tax, HMRC will not simply take your account’s profits as your income; they adjust your profits. Common adjustments include:

  • HMRC will add back any deduction you have made to depreciate your assets (plant, equipment, vehicles and other relevant assets) and replace this with a capital allowance claim. The amount of the claim allowed will depend on the amount and type of asset purchased.
  • Entertaining costs are generally disallowed.
  • Any costs you have claimed that have a personal use element: motor expenses for example; will be disallowed.

Your profits for tax purposes may also be increased if you have sold equipment.

Preparing For Self Assessment

As you will probably be paying any income tax or NIC from your business bank account, it is sensible to prepare your accounts as soon as you can following your year-end.

In this way, your adviser can calculate liabilities and you will have advance notice of the amounts payable. This will also give you time to accumulate funds to meet the tax and NIC payments when they fall due.


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