Tax return - Form 11

HevB

I am due to meet with an accountant in the next week but before meeting her I would like to clarify what 'drawings' vs 'profit' means. Unfortunately I now realise how naive I am regarding accounting and tax returns.

Did my own last year but now my turnover this year has been much greater and wonder how well I have calculated my preliminary tax. I am a PAYE employee but also registered as self-employed. I do not as yet have a business account but will definitely be getting one next year - seems to me it will make things a whole lot easier.

Please can someone explain what 'drawings' actually means and if there is a limit - some people seem to be saying they are non-taxable but that doesn't make sense to me.

Thanking you in advance - naive new business woman!

dbran

Hi

If you are a sole trader then you are assessable to tax on the profits of the business. This is not the same as the amount you withdraw from the business to live. When you think about it when you raise an invoice to a client for work done, this represents income and profit but if you haven't been paid you are unable to take it out ie no drawings.

However if you have money in the bank you are able to pay yourself money even though you may not have been doing any work or earning income during the period ie drawings but no profit.

If you are operating as a company then this is different as a company works on salary. In this case if you withdraw money from he company then it is taxable as it is a salary.

When you go see your account she should be able to straighten things out further.

Kind Regards

dbran

smcgiff

HevB wrote: »

and wonder how well I have calculated my preliminary tax.

Did you pay enough to cover 100% of your prior year tax liability. If so, you're covered.

HevB

Hiya

Business made a loss in 2008 - first year of business. Therefore didn't have to pay preliminary tax for 2009. Made a small profit in 2009 but has made a much greater profit this year. I've to pay 90% for 2010 as preliminary tax don't I?

Thanks

DoMyBooks

No you can also pay 100% of 2009s liability as preliminary tax. http://goo.gl/vfEN

If you have a large profit it might be worth looking at pension contributions to reduce the bill. Your accountant will advise you in this area.

HevB

Thanks a million for that link. I read somewhere that you could be penalised if the preliminary tax is significantly lower than what is actually due for the year?

kennyb3

HevB wrote: »

Thanks a million for that link. I read somewhere that you could be penalised if the preliminary tax is significantly lower than what is actually due for the year?

Yes that is true but only if you didnt pay 100% of the p/y liability (say if you only paid 80% of the p/y liability as prelim tax then you would be subject to the 90% of current year rule). As stated above if you paid 100% of p/y liability you are covered no matter how much your liability is.

Of course with higher profit you will owe more tax this year plus have higher prelim tax for next year so unfortunately you ll be facing a double whack. This is why i always advise people to get an accountant when starting out - to plan ahead not just for now.