Sole trader drawings

[heybyrne]

So I'm all setup as a sole trader and have had some work on a day rate basis. I have browsed the forum but haven't found a definitive answer.... yet!

I'm due to send an invoice which will be paid directly into my business account, and now I'm stuck. I understand I will need to pay national insurance and tax on 'profit', but what on earth is profit when there are no outgoings?

Old colleagues and family have told me to keep 30% in the business account before drawings and I'll be fine - would you agree with this?

Is anyone else setup as a sole trader and if so what do you normally do with your business income, especially as it will be variable each month :/

[djb]

I’m currently self-employed but yet to really get started, however I was self-employed a few years back and I can tell you that keeping 30% aside is a good idea - 28% if you want to be totally correct. That way when the tax bill comes in hopefully you’ll have a pleasant surpise and get a bit of cash left over. I kept 25% which may tell you how long ago it was I last did a tax return ;)

You say what is profit if there are no outgoings, well all the money you make if that’s the case, however a good accountant will add in things like the electricity and heating of the room you’re using (if you’re at home), other stuff like mobile phone bills, broadband etc. Take all this off the tax bill and suddenly that 28% you’ve been keeping is definitely overkill.

I’m no accountant and please don’t take my advice as law, but ask around and you’ll pick up some tips and maybe avoid having to pay more than you should.

[Boss Hog]

30% is a good figure to put by and as DJB mentioned you will more than likely have a few quid left over at the end of the year so its a good way to save.

[creatabledesign]

I am in the same boat Stuart, although I have a slightly different situation and a confusing one because I have a full time job as well. I may be making the mistake at the minute though as I am currently only setting aside 25%... Perhaps a mistake that I might pay for so I guess it's time to go back and reevaluate mine lol.

Anyhow, as the guys have said speak to an accountant and see what they have to say... I beleive even the citizen's advice may be able to help out. At least for the time being it's free. I wish I was in the position to leave my full time job lol. Good luck on your new venture though.

[heybyrne]

Thank you all.

Well my dad had an accountant who said you don't pay any tax / NI upfront for the first year, but the dope thought it was free for a year - BIG mistake and a hefty wedge to pay at the end. This a lesson I am trying to learn from, but as he is a Ltd Company I understand the liability (to an extent) differs to that of a Sole Trader so I'm being as careful as possible and thinking up a list of expenses like djb mentioned to increase the amount I can earn before paying tax.

I am also looking for full time work aswell Johnathan as I still try and perfect the art of 'sales' to stablise regular work but have part time work to get me through. I just want to make sure I don't get stung and I think the 30% retention might provide a little bonus at the end of year.

Thank you again all, and good luck as well Johnathan with everything, we'll get there hey!

[creatabledesign]

In my first year (last year) my pc died after about 10 days (3 year old pc) so instantly I had a whopping expense to pay and as it happens I ended up making a huge loss in my first tax year (actually 5 months) so I expected it. So potentially, IF you can afford it a new PC could help for your first year because the way I understand it, you buy a pc for 1000 and you won't get taxed on the month you earn to cover that 1000. That's how it was explained to me anyhow lol.

We certainly will get there, I am just working on a site for a new customer currently :)

[dot design]

30% is a good figure to put by and as DJB mentioned you will more than likely have a few quid left over at the end of the year so its a good way to save.

I'd agree 30% is a good figure to aim to set aside.

[Katedesign]

Get a good accountant - one will probably give you some free advice. . . and if he is good won't be much of a cost to your business

[zod]

The first 6 grand you make is tax free each year so try and work out a projection of what you will make in a year minus £6000 then work out what 25% of that remainder is. I prefer to stay on top of my books and know exactly how much profit I have made at any point in the year along with projected profit based on projects that are lined up (usually 6 months worth).

Also, if you are starting up, you will most likely be needing things and sometimes it may work out best to buy things you need (large purchases) rather than pay tax - your accountant will advise on when best to do that and how much to spend. Sounds odd, but sometimes buying something you are going to have to get eventually may eliminate your tax bill and you sort of feel like you are getting the item half price.

[heybyrne]

Thank you again for this advice, feeling a lot more comfortable about this :)