I am aware that interest received on a business account can be handled in QF by debiting bank and crediting interest received. I note also that any entries made like this show as part of turnover in the P&L account. This seems fair enough for small amounts, but I am keen to learn about what to do in a couple of different scenarios.
Over the last 12-18 months I have actually invested some of my retained profits into an ISAs. By their very nature, these are tax-free savings products and clearly pay interest (tax free!). Should this type of interest be recorded in the books in the same way as I have described in my opening paragraph? If so, then this does not seems right as the interest will flow straight down to the taxable net profit and serve to take me nearer to the threshold limit…potentially meaning I will be paying tax!
Could anyone give me a definitive answer (accountants?) on this please as I am somewhat confused?
Are you a sole trader or a limited company? I’d have assumed ISA interest is money that belongs to you as an individual (the “I” in the name) and isn’t relevant to your business accounts.
I am a sole trader. I have invested business cash, not personal money
As a sole trader there’s no legal distinction between business and personal money. From a book-keeping point of view I’d treat the money you took out of the business to put into your ISA as drawings, and don’t record the interest at all. If/when you put the capital back into the business that can be capital introduced.
ISA interest doesn’t figure in your tax return at all, being tax free. Other interest will have been taxed at source and you list it in its own section of the tax return, not as part of the self-employment pages.
Edit: I’m not an accountant, I’m just going on what my own accountant told me last year.
Ian,
Thanks for your thoughts/suggestions on this. On a similar theme, I have also taken money out of the business and invested it on the stock market (into trusts and shares) - again within an ISA. I have just sold some funds and made a profit. Let x= base capital invested and y=profit made. I have withdrawn y and re-invested x. At the moment, I have placed profit (y) back in my business current account and tagged it as new capital introduced. Does that sound right? Robin