Income Tax & Class 4 NICs

As a sole Trader I submitted my return for last year and paid the amount owing for tax and Class 4 NIC. How do I account for this in Quick File?

that will be drawings

I am a sole trader. Can I please check my understanding on thresholds and amounts for paying basic rate income tax and Class 4 NI contributions:

  1. I am aware that my personal allowance is £10,000. So if, at the end of the tax year, my QF adjusted taxable profit is £12,500.00, then I will have to pay income tax on the £2500 @ 20% (i.e. £500) - is that correct?

  2. Regarding Class 4s: For the 2014/15 tax year, the lower limit is £7956. In my above example, does this mean that I would have to pay 9% of £4544 (£12500 - £7956), which equals £408.96?

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Hi Matthew - as the end of the tax year looms a little closer, thought I would read any posts on income tax and class 4’s. I believe you are quite correct with your example above. Like you, I am a sole trader, so will close my tax year-end in the books on or after 5/4/15. I pay my Class 2 Nat Insurance on a monthly direct debit so I know full well that the double entry is to Cr bank and Dr drawings (3100) for this each month. By definition, the final Class 4 liability will be treated the same way, but what is the situation for income tax owed? Is that, as Faraday suggests, also to be treated as drawings? I suppose it must as I cannot see any nominal code in the chart of accounts that relates to taxation! What do you think?

Income tax would be the same - transfer to drawings. Self employed tax and NI is a payment from you as an individual to HMRC, not a business expense. Any payments of personal expenses from the business account count as drawings - you’re conceptually transferring money from the business to yourself (and then using that money to pay your liability to HMRC, but that’s irrelevant to QuickFile).

I have three expense areas which have been paid for out of personal money. One example is vehicle costs/travelling - I use my private car as a ‘van’ for getting to and from clients and record the daily business mileage. All petrol and other associated expenses have been paid for from personal funds. I know I can use the hmrc-approved simplified flat rate method and ‘claim’ back 45p/mile and deduct this from the taxable net profit figure. (i know there is a recently updated guide on this in the QF help area). This is ok, but in reality I am out of pocket from a personal funds point of view. Could I take the total business miles, divide by an average miles per gallon, work out total litres consumed and multiply this by rough average fuel cost per litre to come up with a total cost? This in effect would be what the business owes me.

Similar scenario with my mobile phone and internet costs.

Anybody got any thoughts on this?

If you are self employed then you can take any money you like out of the business at any time without affecting your tax liability. How you account for car expenses for tax purposes and how you actually pay for them are two separate issues. The tax accounting would be to pay 45p/mile from proprietor drawings account to a fake supplier for mileage expenses, the money you take from the business to pay yourself back for your out of pocket expenses would simply be a transfer from the business bank account to the proprietor drawings account.

I don’t know how it works if you’re ltd, in that case ask your accountant.

Hi Ian

Can you - or anyone else reading this - explain in layman’s terms how I actually record a self employed tax and NIC payment in Quickfile? I know it should be tagged as Drawings, but I’m not actually given that as an option when categorising my payment, so I’m a bit stumped. I’m sure I’m probably doing something incorrectly but I don’t understand what!

Thanks in advance.

If you pay your personal self assessment tax bill from your business account, then what you are effectively doing is drawing money out of the business for personal use - the fact that that “use” is to hand over to HMRC is irrelevant to your accounts in QuickFile, it’s simply business money being used for a non-business purpose. This is what we mean when we say you need to treat it as drawings.

So the standard way to handle money taken in drawings in QuickFile is to tag the payment as a “transfer between accounts”, with the target bank account being the “proprietor drawings account”. This bank account will fluctuate up and down through the year as you either take drawings out of the business, or use personal funds to pay for business purchases (which is effectively putting the drawn money back in to the business). If you’ve drawn out more than you put in the balance will be positive (a debit, so an asset on your balance sheet), if you’ve put in more than you’ve drawn out the balance will show as overdrawn (a credit or liability on the balance sheet).

At the end of your business accounting year (typically the end of March or the 5th April) you would then journal any remaining balance on your proprietor drawings bank account over to the drawings nominal code in the 3xxx capital and reserves section, to zero out the bank account for the start of the next financial year.

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