Sole traders: drawings on your business explained
Posted on 18th May 2022
As a sole trader there isn’t any legal difference between you and your business. You are responsible for your business debts but you can also take money out of your business, known as drawings, without additional tax implications.
What are drawings?
Your drawings can be withdrawals from your business bank account, transfers from your business bank account to a personal account, or payments for personal costs from your business's bank account.
Personal costs could include contributions to your pension scheme which you will show separately from your business accounts in your SAT return. HMRC views your own income tax and National Insurance payments as personal liabilities rather than a business cost for sole traders. Personal costs also include things like your weekly shopping or a family holiday.
Drawings and wages – what’s the difference?
If you were employed before becoming a sole trader, you will have received a weekly or monthly wage or salary. Wages are paid by registered companies that are employers. If you own a company you can register as an employer and pay yourself a wage. Wages are seen as an allowable business expense and are tax-deductible but they need to be calculated and recorded through the pay as you earn (PAYE) system.
When you’re a sole trader rather than owning a limited company you can’t pay yourself a wage. The drawings you make from your business aren’t seen as a business expense when calculating your business profit, so they aren’t tax-deductible.
How should I structure my drawings?
Your personal and business finances are linked when you’re a sole trader, but it’s still important to keep them separate to avoid confusion.
The best way to keep things organised is to create a separate business account. Then you can regularly make drawings for the same amount each week or month and pay them into your personal account, so you will know you have enough money to meet your needs. As long as you have a clear picture of how much money comes into your business each month you can manage your drawings so there’s enough left to pay your business expenses.
Don’t forget your taxes
You will be taxed on your drawings as personal income, so you will need accurate records of how much you have received. Once you have submitted your SAT return you will need to make sure you have enough to pay your tax bill on 31 January and payments on account for the coming tax year might also be due.
The income tax rates in 2022/23 are 20% on income between £12,571 and £50,270, 40% on income between £50,271 and £150,000 and there’s an additional rate of 45% on income above £150,000.
You will also need to pay National Insurance Contributions (NICs) once you are earning above a certain amount. Currently NIC Class 2 payments are due if you earn more than the Small Profits Threshold (SPT) of £6,515. NIC Class 4 payments are due when you earn more than the Lower Profits Limit (LPL) of £9,880. In July the Class 4 LPL threshold will be aligned with personal income tax at £12,570. The NICs you pay change when you earn more than £50,270.
Allowable business expenses
You can deduct certain allowable expenses that will reduce your personal tax bill as long as you have accurate records. These include business vehicle insurance, fuel, and transport expenses, legal expenses, business insurance, and accounting costs, marketing, rent and bills for your business premises, stationery, postage, and workwear.
Please get in touch if you would like to discuss your business finances as a sole trader.
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